Question

Natalie’s friend, Curtis Lesperance, decides to meet with Natalie after hearing that her discussions about a possible business partnership with her friend Katy Peterson have failed. (Natalie had decided that forming a partnership with Katy, a high school friend, would hurt their friendship. Natalie had also concluded that she and Katy were not compatible to operate a business venture together.) Because Natalie has been so successful with Continuing Cookie Chronicle 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. Because of the advantage of limited personal liability, they decide to form a 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 to give her cooking-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. Curtis’s Coffee Continuing Cookie Chronicle Cash $7,130 $12,000 Accounts receivable 100 800 Inventory 450 1,200 Equipment 2,500 1,000 * *Cookie Chronicle decided not to buy the delivery van considered in Chapter 10. 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, 2020, 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. The assets held by each of their sole proprietorships will be transferred into the corporation at current market value. Curtis will receive 10,180 common shares, and Natalie will receive 15,000 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: Prepare the journal entries required on November 1, 2020, the date when Natalie and Curtis transfer the assets of their respective businesses into Cookie & Coffee Creations Inc.

Assume that Cookie & Coffee Creations Inc. issues 1,000 $0.50 noncumulative preferred shares to Curtis’s dad and the same number to Natalie’s 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. Prepare the opening balance sheet for Cookie & Coffee Creations Inc. as of November 1, 2020, including the journal entries in (b) and (c) above.

Accounts Receivable
Cash
Common Stock
Equipment
Income Summary
Inventory
Land
Organization Expense
Paid-in Capital from Treasury Stock
Paid-in Capital in Excess of Par-Common Stock
Paid-in Capital in Excess of Par-Preferred Stock
Paid-in Capital in Excess of Stated Value-Common Stock
Patents
Preferred Stock
Retained Earnings
Share Capital-Ordinary
Share Capital-Preference
Share Premium-Ordinary
Share Premium-Preference
Treasury Stock

Answer 1

	a)1) The proposal to allot preferred stock to Curtis's dad & Natalie's grandmother is a very good proposal,since they are interested in investing money in the business.The advantage of issuing them preferred stock over common stock are as follows
	i)Preferred stock holders always have precedence over common stock holders in case of getting dividends.They get a fixed amount of dividend & are considered to be safer investment than common stock
	ii)Preferred stock holders also get their money first in the case of liquidation of the company.After the debt holders are paid back their money,preferred stock holders get their money & then the common stock holders receive any money.
	2)The lawyer can be issued common stock of the new Company against the legal fees of $750.Accounting for the same can be done in the following manner
	Date	General Journal	Debit	Credit
		Legal fees	$750
		Common stock		$750
		(Being common stock given in the settlement of legal fees)
	b)The journal entries for transfer of assets to the company are as follows
	In the books of Cookie & Coffee Creations Inc.
	Date	General Journal	Debit	Credit
	11/1/2020	Cash A/c	$7,130
		Accounts Receivable	$100
		Inventory	$450
		Equipment	$2,500
		Common stock		$10,180
		(Being 10,180 shares issued to Curtis at par)
	11/1/2020	Cash A/c	$12,000
		Account Receivable A/c	$800
		Inventory A/c	$1,200
		Equipment	$1,000
		Common stock		$15,000
		(Being 15,000 shares issued to Natalie at par)
	c)Journal Entries
	In the books of Cookie & Coffee Creations Inc
	Date	General Journal	Debit	Credit
	11/1/2020	Cash A/c	$10,000
		$0.50 noncumulative Preferred stock		$10,000
		(Being 1000 preferred stock each issued to Curtis's dad
		& Natalie's grandmother at $5 each)
	11/1/2020	Legal Expenses	$750
		Common stock		$750
		(Being 750 shares issued to the lawyer against the legal fees)
	Assumption:In the absence of information about the Face Value of Preferred stock it has been assumed that Face Value is $5 per share.
	d.In the books of Cookie & Coffee Creations
	Balance Sheet as at Nov 1,2020
	Assets
	Current Assets
	Cash	$29,130
	Account Receivable	$900
	Inventory	$1,650
	Total Current Assets		$31,680
	Equipment	$3,500
	Organization Expenses	$750	$4250
	Total Assets		$35,930
	Liabilities & Shareholder's Equity
	Preferred stock	$10,000
	(Being 2,000 $0.50 non cumulative preferred stock issued at F V of $5 each)
	Shareholder's Equity	$25,930
	(Being 25,930 shares issued at par at F V $1 each)
	Total Liabilities & Shareholder's Equity		$35,930