Continuing Cookie Chronicle

(Note:This is a continuation of the Cookie Chronicle from Chapters 1 through 10.)

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Part 1Because Natalie has been so successful with Cookie Creations and Curtis has been just as successful with his coffee shop, they both conclude that they could benefit from each other’s business expertise. Curtis and Natalie next evaluate the different types of business organization, and because of the advantage of limited personal liability, decide to form a new corporation.

Curtis has operated his coffee shop for 2 years. He buys coffee, muffins, and cookies from a local supplier. Natalie’s business consists of giving cookie-making classes and selling fine European mixers. The plan is for Natalie to use the premises Curtis currently rents as a location for her cookie-making classes and demonstrations of the mixers that she sells. Natalie will also hire, train, and supervise staff hired to bake cookies and muffins sold in the coffee shop. By offering her classes on the premises, Natalie will save on travel, and the coffee shop will provide one central location for selling the mixers. Combining forces will also allow Natalie and Curtis to pool their resources and buy a few more assets to run their new business venture.

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

 

Description	Curtis’ Coffee	Cookie Creations
Cash	$ 7,500	$12,000
Accounts receivable	100	500
Merchandise inventory	450	1,130
Equipment	2,500	1,000
	$10,550	$14,630

Curtis and Natalie meet with a lawyer and form their corporation, called Cookie & Coffee Creations Inc., on November 1, 2015. The new corporation is authorized to issue 50,000 shares of $1 par common stock and 10,000 shares of no par, $6 cumulative preferred stock.

The assets held by each business will be transferred into the corporation at current market value of $1 per share. Curtis will receive 10,550 common shares, and Natalie will receive 14,630 common shares in the corporation.

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

1. Curtis’ dad and Natalie’s grandmother are interested in investing $5,000 each in the new business venture. Curtis and Natalie are considering issuing them preferred shares. What would be the advantage of issuing them preferred stock instead of common?

2. What would be the advantages and disadvantages of issuing cumulative preferred?

3. “Our lawyer sent us a bill for $750. When we talked the bill over with her, she said she would be willing to receive common stock in our corporation instead of cash. We would be happy to issue her stock, but we’re worried about accounting for this transaction. Can we do this? If so, how do we determine how many shares to give her?”

Instructions

Part 2 After establishing their company’s fiscal year-end to be October 31, Natalie and Curtis began operating Cookie & Coffee Creations Inc. on November 1, 2015. The company had the following selected transactions during its first fiscal year of operations.

Jan. 1 Issued an additional 800 preferred shares to Natalie’s brother for $4,000 cash.

June. 30 Repurchased 750 shares issued to the lawyer, for $500 cash. The lawyer had decided to retire and wanted to liquidate all of her assets.

Oct. 15 The company had a very successful first year of operations and as a result declared dividends of $28,000, payable November 15, 2016. (Indicate the amounts payable to the preferred stockholders and to the common stockholders.)

Oct. 31 The company earned revenues of $472,500 and incurred expenses of $416,500 (including the $750 legal expense from November 1 but excluding income tax). Record income tax expense, assuming the company has a 20% income tax rate.

Instructions

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