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

                                         Greg’s Cinnamon Rolls                  Your Business

Cash                                                    $9,500                         $11,650

Accounts receivable                                210                                985

Inventory                                                 650                             2,800

Equipment                                            2,500                             1,850*

Other Assets                                        1,480                                840

*you decided not to buy the delivery van considered in level 8.

 

Combining forces will also allow you and Greg to pool your resources and buy a few more assets to run your new business venture.

Greg and you then meet with a lawyer and form a corporation on November 1, 2021, called Sunrise Bakery 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.

The assets held by each of your businesses will be transferred into the corporation at current market value. Greg will receive 14,340 common shares, and you will receive 18,125 common shares in the corporation.

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

You and Greg are very excited about this new business venture. However, you have the following questions:

1. “Greg’s dad and your parents are interested in investing $5,000 each in the business venture. You are thinking of issuing them preferred shares. What would be the advantage of issuing them preferred shares instead of common shares?”
2. “Your lawyer has sent you a bill for $750.When you 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. You would be happy to issue her shares, but you’re a bit worried about accounting for this transaction. Can you do this? If so, how do you determine how many shares to give her?”

Required part B

1. Answer the questions.
2. Prepare the journal entries required on November 1, 2021, the date when You and Greg transfer the assets of your respective businesses into Sunrise Bakery Inc.
3. Assume that Sunrise Bakery Inc. Issues 1,000 $0.50 noncumulative preferred shares to Greg’s dad and the same number to Your parents, in both cases for $5,000. Also assume that Sunrise Bakery Inc. issues 750 common shares to its lawyer. Prepare the journal entries for each of these transactions. They all occurred on November 1.
4. Prepare the opening balance sheet for Sunrise Bakery Inc. as of November 1, 2021, including the journal entries in (B) and (C) above.