Part 1: answer (a), (b), (c), and (d).

Part 2: answer (a), (b), (c), and (d). Godspeed, and good luck!!!

CC11 Cookie Creations

Natalie and her friend Curtis Lesperance decide that they can benefit from joining Cookie Creations and Curtiss coffee shop. In the first part of this problem, they come to you with questions about setting up a corporation for their new business. In the second part of the problem, they want your help in preparing financial information following the first year of operations of their new business, Cookie & Coffee Creations.

Part 1

Curtis has operated his coffee shop for 2 years. He buys coffee, muffins, and cookies from a local supplier. Natalies business consists of giving cookie-making classes and selling fine European mixers. The plan is for Natalie to use the premises Curtis currently rents to give her cookie-making classes and demonstrations of the mixers that she sells. Natalie will also hire, train, and supervise staff to bake the cookies and muffins sold in the coffee shop. By offering her classes on the premises, Natalie will save on travel time going from one place to another. Another advantage is that the coffee shop will have one central location for selling the mixers.

The current market values of the assets of both businesses are as follows.

Curtiss Coffee Cookie Creations

Cash $7,500 $11,630

Accounts receivable 100 800

Inventory 450 1,200

Equipment 2,500 1,000*

*Cookie Creations decided not to buy the delivery van considered in Chapter 9.

Combining forces will also allow Natalie and Curtis to pool their resources and buy a few more assets to run their new business venture.

Curtis and Natalie then meet with a lawyer and form a corporation on November 1, 2016, called Cookie & Coffee Creations Inc. The articles of incorporation state that there will be two classes of shares that the corporation is authorized to issue: common shares and preferred shares. They authorize 100,000 no-par shares of common stock,

and 10,000 no-par shares of preferred stock with a $0.50 noncumulative dividend.

CC11 (Continued)

The assets held by each of their businesses will be transferred into the corporation at current market value. Curtis will receive 10,550 common shares, and Natalie will receive 14,630 common shares in the corporation.

Therefore, the shares have a fair value of $1 per share.

Natalie and Curtis are very excited about this new business venture. They come to you with the following questions:

1. Curtiss dad and Natalies grandmother are interested in investing $5,000 each in the business venture. We are thinking of issuing them preferred shares. What would be the advantage of issuing them preferred shares instead of common shares?

2. Our lawyer has sent us a bill for $750.When we discussed the bill with her, she indicated that she would be willing to receive common shares in our new corporation instead of cash for her services. We would be happy to issue her shares, but were a bit worried about accounting for this transaction. Can we do this? If so, how do we determine how many shares to give her?

Instructions

(a) Answer their questions.

(b) Prepare the journal entries required on November 1, 2016, the date when Natalie and Curtis transfer the assets of their respective businesses into Cookie & Coffee Creations Inc.

(c) Assume that Cookie & Coffee Creations Inc. issues 1,000 $0.50 noncumulative preferred shares to Curtiss dad and the same number to Natalies grandmother, in both cases for $5,000. Also assume that Cookie & Coffee Creations Inc. issues 750 common shares to its lawyer. Prepare the journal entries for each of these transactions. They all occurred on November 1.

(d) Prepare the opening balance sheet for Cookie & Coffee Creations Inc. as of November 1, 2016, including the journal entries in (b) and (c) above.

CC11 (Continued)

Part 2

After establishing their companys fiscal year-end to be October 31, Natalie and Curtis begin operating Cookie & Coffee Creations Inc. on November 1, 2016. On that date, after the issuance of shares, the paid-in capital section of the companys balance sheet is as follows.

Paid-in capital

Preferred stock, $0.50 noncumulative, no par value,

10,000 shares authorized, 2,000 shares issued $10,000

Common stock, no par value, 100,000 shares

authorized, 25,930 shares issued 25,930

Cookie & Coffee Creations then has the following selected transactions during its first year of operations.

Dec. 1 Issues an additional 800 preferred shares to Natalies brother for $4,000.

Apr. 30 Declares a semiannual dividend to the preferred stockholders of record on May 15, payable on June 1.

June 30 Repurchases 750 shares of common stock issued to the lawyer, for $500. Recall that these were originally issued for $750. The lawyer had decided to retire and wanted to liquidate all of her assets.

Oct. 31 The company has had a very successful first year of operations. It earned revenues of $462,500 and incurred expenses of $364,050 (including $750 legal fee, but excluding income tax).

31 Records income tax expense. (The company has a 20% income tax rate.)

31 Declares a semiannual dividend to the preferred stockholders of record on November 15, payable on December 1.

Instructions

(a) Prepare the journal entries to record the above transactions.

(b) Prepare the retained earnings statement for the year.

(c) Prepare the stockholders equity section of the balance sheet as of October 31.

(d) Prepare closing entries.