CONTINUINGCOOKIECHRONICLE

CCC1NatalieKoebelspentmuchofherchildhoodlearningtheartofcookiemakingfromhergrandmother.
Theypassedmanyhappyhoursmasteringeverytypeofcookieimaginableandlatercreatingnewrecipesthat
werebothhealthyanddelicious.Nowatthestartofhersecondyearincollege,Natalieisinvestigatingvarious
possibilitiesforstartingherownbusinessaspartoftherequirementsoftheentrepreneurshipprograminwhich
sheisenrolled.
AlongtimefriendinsiststhatNataliehastosomehowincludecookiesinherbusinessplan.Afteraseries
ofbrainstormingsessions,Nataliesettlesontheideaofoperatingacookiemakingschool.Shewillstartona
parttimebasisandofferherservicesinpeopleshomes.Nowthatshehasstartedthinkingaboutit,the
possibilitiesseemendless.Duringthefall,shewillconcentrateonholidaycookies.Shewillofferindividual
lessonsandgroupsessions(whichwillprobablybemoreentertainmentthaneducationfortheparticipants).
Nataliealsodecidestoincludechildreninhertargetmarket.
Nataliehopesthatduringherremaining3yearsatcollegesheisabletobecomeacompetent
businessperson.Upongraduation,herplaniseithertoexpandthebusinessintoafulltimecareerortotransfer
ownershiptoanotherstudent.
Thefirstdifficultdecisioniscomingupwiththeperfectnameforherbusiness.Intheend,shesettleson
CookieCreationsandthenmovesontomoreimportantissues.
Instructions
(a) Whatformofbusinessorganizationproprietorship,partnership,orcorporationdoyourecommendthat
Natalieuseforherbusiness?Discussthebenefitsandweaknessesofeachformandgivethereasonsforyour
choice.
(b) WillNatalieneedaccountinginformation?Ifyes,whatinformationwillsheneedandwhy?Howoftenwill
sheneedthisinformation?
(c) IfNataliechoosesthecorporateformoforganization,identifyspecificasset,liability,andequityaccounts
thatCookieCreationswilllikelyusetorecorditsbusinesstransactions.
(d) ShouldNatalieopenaseparatebankaccountforthebusiness?Whyorwhynot?

CONTINUINGCOOKIECHRONICLE

(Note:ThisisacontinuationoftheCookieChroniclefromChapter1.)
CCC2Afterresearchingthedifferentformsofbusinessorganization,NatalieKoebeldecidestooperateCookie
Creationsasacorporation.Shethenstartstheprocessofgettingthebusinessrunning.InNovember2010,the
followingactivitiestakeplace.
Nov.8 NataliecashesherU.S.SavingsBondsandreceives$520,whichshedepositsinherpersonalbank
account.
8 SheopensabankaccountunderthenameCookieCreationsandtransfers$500fromherpersonal
accounttothenewaccountinexchangeforcommonstock.
11 Nataliepays$165tohaveadvertisingbrochuresandpostersprinted.Sheplanstodistributetheseas
opportunitiesarise.(Hint:UseAdvertisingSupplies.)
13 Shebuysbakingsupplies,suchasflour,sugar,butter,andchocolatechips,for$125cash.
14 Nataliestartstogathersomebakingequipmenttotakewithherwhenteachingthecookieclasses.She
hasanexcellenttopofthelinefoodprocessorandmixerthatoriginallycosther$750.Nataliedecidestostart
usingitonlyinhernewbusiness.Sheestimatesthattheequipmentiscurrentlyworth$300.Sheinveststhe
equipmentinthebusinessinexchangeforcommonstock.
16 Natalierealizesthatherinitialcashinvestmentisnotenough.Hergrandmotherlendsher$2,000cash,
forwhichNataliesignsanotepayableinthenameofthebusiness.Nataliedepositsthemoneyinthebusiness
bankaccount.(Hint:Thenotedoesnothavetoberepaidfor24months.Asaresult,thenotespayableshouldbe
reportedintheaccountsasthelastliabilityandalsoonthebalancesheetasthelastliability.)
17 Shebuysmorebakingequipmentfor$900cash.
20 Sheteachesherfirstclassandcollects$125cash.
25 NataliebooksasecondclassforDecember4for$150.Shereceives$30cashinadvanceasadown
payment.
30 Nataliepays$1,320foraoneyearinsurancepolicythatwillexpireonDecember1,2011.
Instructions
(a) PreparejournalentriestorecordtheNovembertransactions.

(b) Postthejournalentriestogeneralledgeraccounts.

(C)

PREPAREATRIALBALANCEATNOVEMBER30.

CONTINUINGCOOKIECHRONICLE

(Note:ThisisacontinuationoftheCookieChroniclefromChapters1and2.Usetheinformationfromthe
previouschaptersandfollowtheinstructionsbelowusingthegeneralledgeraccountsyouhavealready
prepared.)
CCC3ItistheendofNovemberandNataliehasbeenintouchwithhergrandmother.Hergrandmotherasked
Nataliehowwellthingswentinherfirstmonthofbusiness.Natalie,too,wouldliketoknowifshehasbeen
profitableornotduringNovember.NatalierealizesthatinordertodetermineCookieCreationsincome,she
mustfirstmakeadjustments.
Natalieputstogetherthefollowingadditionalinformation.
1. Acountrevealsthat$60ofbrochuresandpostersremainattheendofNovember.
2. Acountrevealsthat$35ofbakingsupplieswereusedduringNovember.
3. Natalieestimatesthatallofherbakingequipmentwillhaveausefullifeof5yearsor60monthsandzero
salvagevalue.(AssumeNataliedecidestorecordafullmonthsworthofdepreciation,regardlessofwhenthe
equipmentwasobtainedbythebusiness.Roundtothenearestdollar.)
4. Nataliesgrandmotherhasdecidedtochargeinterestof6%onthenotepayableextendedonNovember16.
Theloanplusinterestistoberepaidin24months.(Assumethathalfamonthofinterestaccruedduring
November.)
5. OnNovember30,afriendofNataliesaskshertoteachaclassattheneighborhoodschool.Natalieagrees
andteachesagroupof35firstgradestudentshowtomakeSantaClauscookies.Thenextday,Natalieprepares
aninvoicefor$300andleavesitwiththeschoolprincipal.Theprincipalsaysthathewillpasstheinvoicealong
totheheadoffice,anditwillbepaidsometimeinDecember.
6. Nataliereceivesacellphonebillfor$45.Sheuseshercellphoneonlyforbusiness.Thebillisforservices
providedduringNovemberandisdueDecember15.
Instructions
UsingtheinformationthatyouhavegatheredthroughChapter2,andbasedonthenewinformationabove,do
thefollowing.
(a) Prepareandposttheadjustingjournalentries.
(b) Prepareanadjustedtrialbalance.

(C) USINGTHEADJUSTEDTRIALBALANCE,PREPARE
COOKIECREATIONSINCOMESTATEMENTFORTHEMONTH
OFNOVEMBER.
CONTINUINGCOOKIECHRONICLE
(Note:ThisisacontinuationoftheCookieChroniclefromChapter1through3.)
CCC4NataliehadaverybusyDecember.Attheendofthemonth,afterjournalizingandpostingtheDecember
transactionsandadjustingentries.Nataliepreparedthefollowingadjustedtrialbalance.

COOKIECREATIONS

AdjustedTrialBalance
December31,2010
Debit
Credit
Cash
$1,180
AccountsReceivable
875
BakingSupplies
350
PrepaidInsurance
1,210
BakingEquipment
1,200
AccumulatedDepreciationBakingEquipment
AccountsPayable
75
SalariesPayable
56
InterestPayable
15

$40

UnearnedRevenue
300
NotesPayable
2,000
CommonStock
800
Dividends 500
TeachingRevenue
4,515
SalariesExpense
1,006
TelephoneExpense
125
AdvertisingSuppliesExpense
165
BakingSuppliesExpense
1,025
DepreciationExpense 40
InsuranceExpense
110
InterestExpense
15
$7,801
$7,801
Instructions
Usingtheinformationintheadjustedtrialbalance,dothefollowing.
(a) Prepareanincomestatementandaretainedearningsstatementforthe2monthsendedDecember31,2010,
andaclassifiedbalancesheetasofDecember31,2010.Thenotepayablehasastatedinterestrateof6%,andthe
principalandinterestaredueonNovember16,2012.
(b) NataliehasdecidedthatheryearendwillbeDecember31,2010.Prepareandpostclosingentriesasof
December31,2010.

(C) PREPAREAPOSTCLOSINGTRIALBALANCE.
CONTINUINGCOOKIECHRONICLE

(Note:ThisisacontinuationoftheCookieChroniclefromChapters1through4.Fromtheinformationgathered
inthepreviouschapters,followtheinstructionsbelowusingthegeneralledgeraccountsyouhavealready
prepared.)
CCC5BecauseNataliehashadsuchasuccessfulfirstfewmonths,sheisconsideringotheropportunitiesto
developherbusiness.OneopportunityisthesaleoffineEuropeanmixers.TheownerofKzinskiSupplyCo.has
approachedNatalietobecometheexclusivedistributorofthesefinemixersinherstate.Thecurrentcostofa
mixerisapproximately$575,andNataliewouldselleachonefor$1,150.Nataliecomestoyouforadviceon
howtoaccountforthesemixers.Eachappliancehasaserialnumberandcanbeeasilyidentified.
Natalieasksyouthefollowingquestions.
1. Wouldyouconsiderthesemixerstobeinventory?Orshouldtheybeclassifiedassuppliesorequipment?
2. Ivelearnedalittleaboutkeepingtrackofinventoryusingboththeperpetualandtheperiodicsystemsof
accountingforinventory.Whichsystemdoyouthinkisbetter?Whichonewouldyourecommendforthetypeof
inventorythatIwanttosell?
3. HowoftendoIneedtocountinventoryifImaintainitusingtheperpetualsystem?DoIneedtocount
inventoryatall?
Intheend,Nataliedecidestousetheperpetualinventorysystem.Thefollowingtransactionshappenduring
themonthofJanuary.
Jan. 4 BoughtfivedeluxemixersonaccountfromKzinskiSupplyCo.for$2,875,FOBshippingpoint,terms
n/30.
6 Paid$100freightontheJanuary4purchase.
7 ReturnedoneofthemixerstoKzinskibecauseitwasdamagedduringshipping.KzinskiissuesCookie
Creationscreditforthecostofmixerplus$20forthecostoffreightthatwaspaidonJanuary6foronemixer.
8 Collected$375oftheaccountsreceivablefromDecember2010.
12 Threedeluxemixersaresoldonaccountfor$3,450,FOBdestination,ternsn/30.(Costofgoodssoldis
$595permixer.)
14 Paidthe$75ofdeliverychargesforthethreemixersthatweresoldonJanuary12.
14 BoughtfourdeluxemixersonaccountfromKzinskiSupplyCo.for$2,300,FOBshippingpoint,terms
n/30.
17 Natalieisconcernedthatthereisnotenoughcashavailabletopayforallofthemixerspurchased.She
investsanadditional$1,000cashinCookieCreationsinexchangeforcommonstock.
18 Paid$80freightontheJanuary14purchase.
20 Soldtwodeluxemixersfor$2,300cash.(Costofgoodssoldis$595permixer.)

28 Natalieissuedachecktoherassistantforallthehelptheassistanthasgivenherduringthemonth.Her
assistantworked20hoursinJanuaryandisalsopaidthe$56owedatDecember31,2010.(Nataliesassistant
earns$8anhour.)
28 CollectedtheamountsduefromcustomersfortheJanuary12transaction.
30 Paida$145cellphonebill($75fortheDecember2010accountpayableand$70forthemonthof
January).(Recallthatthecellphoneisusedonlyforbusinesspurposes.)
31 PaidKzinskiallamountsdue.
31 Cashdividendsof$750arepaid.
AsofJanuary31,thefollowingadjustingentrydataisavailable.
1. AcountofbakingsuppliesrevealsthatnonewereusedinJanuary.
2. AnothermonthsworthofdepreciationneedstoberecordedonthebakingequipmentboughtinNovember.
(Recallthatthebakingequipmenthasausefullifeof5yearsor60monthsandnosalvagevalue.)
3. Anadditionalmonthsworthofinterestonhergrandmothersloanneedstobeaccrued.(Theinterestrateis
6%.)
4. Duringthemonth,$110ofinsurancehasexpired.
5. AnanalysisoftheunearnedrevenueaccountrevealsthatNataliehasnothadtimetoteachanyofthese
lessonsthismonthbecauseshehasbeensobusysellingmixers.Asaresult,thereisnochangetotheunearned
revenueaccount.NataliehopestocompletetheremaininglessonsinFebruary.
6. AninventorycountofmixersattheendofJanuaryrevealsthatNataliehasthreemixersremaining.
Instructions
Usingtheinformationfrompreviouschaptersandthenewinformationabove,dothefollowing.
(a) AnswerNataliesquestions.
(b) PrepareandposttheJanuary2011transactions.
(c) Prepareatrialbalance.
(d) Prepareandposttheadjustingjournalentriesrequired.
(e) Prepareanadjustedtrialbalance.

(F) PREPAREAMULTIPLESTEPINCOMESTATEMENTFOR
THEMONTHENDEDJANUARY31,2011.
CONTINUINGCOOKIECHRONICLE
(Note:ThisisacontinuationoftheCookieChroniclefromChapters1through5.)
CCC6Natalieisbusyestablishingbothdivisionsofherbusiness(cookieclassesandmixersales)andcompleting
herbusinessdegree.Hergoalsforthenext11monthsaretosellonemixerpermonthandtogivetwotothree
classesperweek.
ThecostofthefineEuropeanmixersisexpectedtoincrease.Nataliehasjustnegotiatednewtermswith
Kzinskithatincludeshippingcostsinthenegotiatedpurchaseprice(mixerswillbeshippedFOBdestination).
AssumethatNataliehasdecidedtouseaperiodicinventorysystemandnowmustchooseacostflowassumption
forhermixerinventory.
ThefollowingtransactionsoccurinFebruarytoMay2011.
Feb.2 NataliebuystwodeluxemixersonaccountfromKzinskiSupplyCo.for$1,200($600each),FOB
destination,termsn/30.
16 Shesellsonedeluxemixerfor$1,150cash.
25 ShepaystheamountowedtoKzinski.
Mar.2 ShebuysonedeluxemixeronaccountfromKzinskiSupplyCo.for$618,FOBdestination,termsn/30.
30 Nataliesellstwodeluxemixersforatotalof$2,300cash.
31 ShepaystheamountowedtoKzinski.
Apr.1 ShebuystwodeluxemixersonaccountfromKzinskiSupplyCo.for$1,224($612each),FOB
destination,termsn/30.
13 Shesellsthreedeluxemixersforatotalof$3,450cash.
30 NataliepaystheamountsowedtoKzinski.
May4 ShebuysthreedeluxemixersonaccountfromKzinskiSupplyCo.for$1,875($625each),FOB
destination,termsn/30.
27 Shesellsonedeluxemixerfor$1,150cash.
Instructions

(a) Determinethecostofgoodsavailableforsale.RecallfromChapter5thatattheendofJanuary,Cookie
Creationshadthreemixersonhandatacostof$595each.

(B) CALCULATE(I)ENDINGINVENTORY,(II)COSTOF
GOODSSOLD,(III)GROSSPROFIT,AND(IV)GROSSPROFIT
RATEUNDEREACHOFTHEFOLLOWINGMETHODS:LIFO,
FIFO,ANDAVERAGECOST.
CONTINUINGCOOKIECHRONICLE
(Note:ThisisacontinuationoftheCookieChroniclefromChapters1through6.)
CCC7Part1Natalieisstrugglingtokeepupwiththerecordingofheraccountingtransactions.Sheisspending
alotoftimemarketingandsellingmixersandgivinghercookieclasses.HerfriendJohnisanaccounting
studentwhorunshisownaccountingservice.HehasaskedNatalieifshewouldliketohavehimdoher
accounting.
JohnandNataliemeetanddiscussherbusiness.JohnsuggeststhathedothefollowingforNatalie.
1. Holdcashuntilthereisenoughtobedeposited.(Hewouldkeepthecashlockedupinhisvehicle).He
wouldalsotakeallofthedepositstothebankatleasttwiceamonth.
2. Writeandsignallofthechecks.
3. Recordallofthedepositsintheaccountingrecords.
4. Recordallofthechecksintheaccountingrecords.
5. Preparethemonthlybankreconciliation.
6. TransferallofNataliesmanualaccountingrecordstohiscomputeraccountingprogram.Johnmaintainsall
oftheaccountinginformationthathekeepsforhisclientsonhislaptopcomputer.
7. PreparemonthlyfinancialstatementsforNatalietoreview.
8. WritehimselfacheckeverymonthfortheworkhehasdoneforNatalie.
Instructions
IdentifytheweaknessesininternalcontrolthatyouseeinthesystemJohnisrecommending.Canyousuggest
anyimprovementsifNataliehiresJohntodotheaccounting?
Part2NataliedecidesthatshecannotaffordtohireJohntodoheraccounting.Onewaythatshecanensurethat
hercashaccountdoesnothaveanyerrorsandisaccurateanduptodateistoprepareabankreconciliationatthe
endofeachmonth.
Nataliewouldlikeyoutohelpher.SheasksyoutoprepareabankreconciliationforJune2011usingthe
followinginformation.
Additionalinformation:
1. OnMay31,thereweretwooutstandingchecks:#595for$238and#599for$361.
2. PremierBankmadeapostingerrortothebankstatement:check#603wasissuedfor$425,not$452.
3. ThedepositmadeonJune20wasfor$125thatNataliereceivedforteachingaclass.Nataliemadeanerror
inrecordingthistransaction.
4. Theelectronicfundstransfer(EFT)wasforNataliescellphoneuse.Rememberthatsheusesthisphoneonly
forbusiness.
5. TheNSFcheckwasfromRonBlack.NataliereceivedthischeckforteachingaclasstoRonschildren.
NataliecontactedRon,andheassuredherthatshewillreceiveacheckinthemailfortheoutstandingamountof
theinvoiceandtheNSFbankcharge.
Instructions
(a) PrepareCookieCreationsbankreconciliationforJune30.
(b) PrepareanynecessaryadjustingentriesatJune30.

(C) IFABALANCESHEETISPREPAREDFORCOOKIECREATIONSATJUNE
30,WHATBALANCEWILLBEREPORTEDASCASHINTHECURRENTASSETS
SECTION?

Cash

GENERALLEDGERCOOKIECREATIONS

Date
2011
June1

Explanation
Balance
1
750
3Check#600
3Check#601
8Check#602
9
1,050
13Check#603
20
155
28Check#604

28

Ref.

Debit

CreditBalance

2,657
3,407

3,681
3,411

625
95
56

2,782
2,687
2,631

425

3,256

297

3,114

110

3,224

PREMIERBANK

StatementofAccountCookieCreations
June30,2011

May31
June1

Balance

Balance
Deposit
750
6Check#600
6Check#601
8Check#602
9Deposit 1,050
10NSFcheck
10NSFfee
14Check#603
20Deposit
23EFTTelus
28Check#599

30

ChecksandDate
3,256
4,066
625
95
56
4,280
100
35
452
1253,818
85
361

BANKCHARGES13

Explanation

OtherDebits

Deposits

3,381
3,286
3,230
4,145
3,693
3,733
3,372

3,359

CONTINUINGCOOKIECHRONICLE
(Note:ThisisacontinuationoftheCookieChroniclefromChapters1through7.)
CCC8OneofNataliesfriends,CurtisLesperance,runsacoffeeshopwherehesellsspecialtycoffeesand
preparesandsellsmuffinsandcookies.HeiseagertobuyoneofNataliesfineEuropeanmixers,whichwould
enablehimtomakelargerbatchesofmuffinsandcookies.However,Curtiscannotaffordtopayforthemixer
foratleast30days.HeasksNatalieifshewouldbewillingtosellhimthemixeroncredit.
Nataliecomestoyouforadvice.Sheasksthefollowingquestions.
1. Curtishasgivenmeasetofhismostrecentfinancialstatements.WhatcalculationsshouldIdowiththe
datafromthesestatements,andwhatquestionsshouldIaskhimafterIhaveanalyzedthestatements?Howwill
thisinformationhelpmedecideifIshouldextendcredittoCurtis?
2. IsthereanalternativeotherthanextendingcredittoCurtisfor30days?
3. Iamthinkingseriouslyaboutbeingabletohavemycustomersusecreditcards.Whataresomeofthe
advantagesanddisadvantagesoflettingmycustomerspaybycreditcard?
ThefollowingtransactionsoccurredinJunethroughAugust2011.
June1 Aftermuchthought,NataliesellsamixertoCurtisoncredit,termsn/30,for$1,150(costofmixer
$620).
30 CurtiscallsNatalie.Heisunabletopaytheamountoutstandingforanothermonth,sohesignsaone
month,8.25%notereceivable.
July31 CurtiscallsNatalie.Heindicatesthatheisunabletopaytodaybuthopestohaveacheckforheratthe
endoftheweek.Nataliepreparesthejournalentrytorecordthedishonoringofthenote.Sheassumesshewillbe
paidwithinaweek.
Aug.7 NataliereceivesacheckfromCurtisinpaymentofhisbalanceowed.
Instructions

(a) AnswerNataliesquestions.

(B) PREPAREJOURNALENTRIESFORTHETRANSACTIONS
THATOCCURREDINJUNE,JULY,ANDAUGUST.(THE
COMPANYUSESAPERPETUALINVENTORYSYSTEM).
ROUNDTONEARESTDOLLAR.
CONTINUINGCOOKIECHRONICLE

(Note:ThisisacontinuationoftheCookieChroniclefromChapters1through9.)
CCC9Natalieisthinkingofbuyingavanthatwillbeusedonlyforbusiness.Thecostofthevanisestimatedat
$36,500.Nataliewouldspendanadditional$2,500tohavethevanpainted.Inaddition,shewantsthebackseat
ofthevanremovedsothatshewillhavelotsofroomtotransporthermixerinventoryaswellasherbaking
supplies.Thecostoftakingoutthebackseatandinstallingshelvingunitsisestimatedat$1,500.Sheexpectsthe
vantolastabout5years,andsheexpectstodriveitfor200,000miles.Theannualcostofvehicleinsurancewill
be$2,400.Natalieestimatesthatattheendofthe5yearusefullifethevanwillsellfor$7,500.Assumethatshe
willbuythevanonAugust15,2011,anditwillbereadyforuseonSeptember1,2011.
Natalieisconcernedabouttheimpactofthevanscostonherincomestatementandbalancesheet.Shehascome
toyouforadviceoncalculatingthevansdepreciation.
Instructions
(a) Determinethecostofthevan.
(b) Preparethreedepreciationtablesfor2011,2012and2013:oneforstraightlinedepreciation(similartothe
oneinIllustration910),onefordoubledecliningbalancedepreciation(Illustration914),andoneforunitsof
activitydepreciation(Illustration912).Forunitsofactivity,Natalieestimatesshewilldrivethevanasfollows:
15,000milesin2011;45,000milesin2012;50,000milesin2013;45,000milesin2014;35,000milesin2015;
and10,000milesin2016.RecallthatCookieCreationshasaDecember31yearend.
(c) WhatimpactwillthethreemethodsofdepreciationhaveonNataliesbalancesheetatDecember31,2011?
WhatimpactwillthethreemethodshaveonNataliesincomestatementin2011?
(d) WhatimpactwillthethreemethodsofdepreciationhaveonNataliesincomestatementoverthevanstotal
5yearusefullife?

(E) WHATMETHODOFDEPRECIATIONWOULDYOU
RECOMMENDNATALIEUSE?
CONTINUINGCOOKIECHRONICLE
(Note:ThisisacontinuationoftheCookieChroniclefromChapters1through9.)
CCC10Natalieisthinkingofrepayingallamountsoutstandingtohergrandmother.RecallthatCookieCreations
borrowed$2,000onNovember16,2010,fromNataliesgrandmother.Interestonthenoteis6%peryear,and
thenoteplusinterestwastoberepaidin24months.Recallthatamonthlyadjustingjournalentrywasprepared
forthemonthsofNovember2010(1/2month),December2010,andJanuary2011.
Instructions
(a) CalculatetheinterestpayablethatwasaccruedandrecordedtoJuly31,2011,assumingmonthlyadjusting
entriesweremade.
(b) PreparethejournalentryatAugust31,2011,torecordonemonthsaccruedinterest.

(C) NATALIEREPAYSHERGRANDMOTHERON
SEPTEMBER15,201110MONTHSAFTERHER
GRANDMOTHEREXTENDEDTHELOANTOCOOKIE
CREATIONS.PREPARETHEJOURNALENTRYFORTHELOAN
REPAYMENT.

CONTINUINGCOOKIECHRONICLE
(Note:ThisisacontinuationoftheCookieChroniclefromChapters1through10.)
CCC11NatalieandherfriendCurtisLesperancedecidethattheycanbenefitfromjoiningCookieCreationsand
Curtisscoffeeshop.Inthefirstpartofthisproblem,theycometoyouwithquestionsaboutsettingupa
corporationfortheirnewbusiness.Inthesecondpartoftheproblem,theywantyourhelpinpreparingfinancial
informationfollowingthefirstyearofoperationsoftheirnewbusiness,Cookie&CoffeeCreations.
Part1Curtishasoperatedhiscoffeeshopfor2years.Hebuyscoffee,muffins,andcookiesfromalocal
supplier.NataliesbusinessconsistsofgivingcookiemakingclassesandsellingfineEuropeanmixers.Theplan
isforNatalietousethepremisesCurtiscurrentlyrentstogivehercookingmakingclassesanddemonstrations
ofthemixersthatshesells.Nataliewillalsohire,train,andsupervisestafftobakethecookiesandmuffinssold
inthecoffeeshop.Byofferingherclassesonthepremises,Nataliewillsaveontraveltimegoingfromoneplace
toanother.Anotheradvantageisthatthecoffeeshopwillhaveonecentrallocationforsellingthemixers.
Thecurrentmarketvaluesoftheassetsofbothbusinessesareasfollows.
CurtissCoffee
CookieCreations
Cash $7,130
$12,000
Accountsreceivable
100
800
Merchandiseinventory
450
1,200
Equipment
2,500
1,000*
*CookieCreationsdecidednottobuythedeliveryvanconsideredinChapter9.
CombiningforceswillalsoallowNatalieandCurtistopooltheirresourcesandbuyafewmoreassetstorun
theirnewbusinessventure.
CurtisandNataliethenmeetwithalawyerandformacorporationonNovember1,2011,calledCookie&
CoffeeCreationsInc.Thearticlesofincorporationstatethattherewillbetwoclassesofsharesthatthe
corporationisauthorizedtoissue:commonsharesandpreferredshares.Theyauthorize100,000noparsharesof
commonstock,and10,000noparsharesofpreferredstockwitha$0.50noncumulativedividend.
Theassetsheldbyeachoftheirbusinesseswillbetransferredintothecorporationatcurrentmarketvalue.Curtis
willreceive10,550commonshares,andNataliewillreceive14,630commonsharesinthecorporation.
Therefore,theshareshaveafairvalueof$1pershare.
NatalieandCurtisareveryexcitedaboutthisnewbusinessventure.Theycometoyouwiththefollowing
questions:
1. CurtissdadandNataliesgrandmotherareinterestedininvesting$5,000eachinthebusinessventure.We
arethinkingofissuingthempreferredshares.Whatwouldbetheadvantageofissuingthempreferredshares
insteadofcommonshares?
2. Ourlawyerhassentusabillfor$750.Whenwediscussedthebillwithher,sheindicatedthatshewouldbe
willingtoreceivecommonsharesinournewcorporationinsteadofcashforherservices.Wewouldbehappyto
issuehershares,butwereabitworriedaboutaccountingforthistransaction.Canwedothis?Ifso,howdowe
determinehowmanysharestogiveher?
Instructions
(a) Answertheirquestions.
(b) PreparethejournalentriesrequiredonNovember1,2011,thedatewhenNatalieandCurtistransferthe
assetsoftheirrespectivebusinessesintoCookie&CoffeeCreationsInc.
(c) AssumethatCookie&CoffeeCreationsInc.issues1,000$0.50noncumulativepreferredsharestoCurtiss
dadandthesamenumbertoNataliesgrandmother,inbothcasesfor$5,000.AlsoassumethatCookie&Coffee
CreationsInc.issues750commonsharestoitslawyer.Preparethejournalentriesforeachofthesetransactions.
TheyalloccurredonNovember1.
(d) PreparetheopeningbalancesheetforCookie&CoffeeCreationsInc.asofNovember1,2011,including
thejournalentriesin(b)and(c)above.
Part2AfterestablishingtheircompanysfiscalyearendtobeOctober31,NatalieandCurtisbeginoperating
Cookie&CoffeeCreationsInc.onNovember1,2011.Onthatdate,aftertheissuanceofshares,thepaidin
capitalsectionofthecompanysbalancesheetisasfollows.
Paidincapital
Preferredstock,$0.50noncumulative,noparvalue,
10,000sharesauthorized,2,000issued
$10,000
Commonstock,noparvalue,100,000shares
authorized,25,930issued
25,930
Cookie&CoffeeCreationsthenhasthefollowingselectedtransactionsduringitsfirstyearofoperations.
Dec. 1 Issuesanadditional800preferredsharestoNataliesbrotherfor$4,000.

Apr. 30 DeclaresasemiannualdividendtothepreferredstockholdersofrecordonMay15,payableonJune
1.
June 30 Repurchases750sharesofcommonstockissuedtothelawyer,for$500.Recallthatthesewere
originallyissuedfor$750.Thelawyerhaddecidedtoretireandwantedtoliquidateallofherassets.
Oct. 31 Thecompanyhashadaverysuccessfulfirstyearofoperations.Itearnedrevenuesof$462,500and
incurredexpensesof$370,000(including$750legalfee,butexcludingincometax).
31 Recordsincometaxexpense.(Thecompanyhasa20%incometaxrate.)
31 DeclaresasemiannualdividendtothepreferredstockholdersofrecordonNovember15,payableon
December1.
Instructions
(a) Preparethejournalentriestorecordtheabovetransactions.
(b) Preparetheretainedearningsstatementfortheyear.
(c) PreparethestockholdersequitysectionofthebalancesheetasofOctober31.
(d) Prepareclosingentries.

(E) CALCULATETHEEARNINGSPERSHARE.ASSUME
WEIGHTEDAVERAGESHARESOF25,680.
CONTINUINGCOOKIECHRONICLE

(Note:ThisisacontinuationoftheCookieChroniclefromChapters1through11.)
CCC12NataliehasbeenapproachedbyKenThornton,ashareholderinTheBeaneryCoffeeInc.Kenwantsto
retireandwouldliketosellhis1,000sharesinTheBeaneryCoffee,whichrepresent30%ofallsharesissued.
TheBeaneryiscurrentlyoperatedbyKenstwindaughters,eachofwhomowns35%ofthecommonshares.
TheBeanerynotonlyoperatesacoffeeshopbutalsoroastsandsellsbeanstoretailers,underthenameRocky
MountainBeanery.
Thebusinesshasbeenoperatingforapproximately5years.Inthelast2yearsKenhaslostinterestandleftthe
daytodayoperationstohisdaughters.Bothdaughtersattimesfindtheworkatthecoffeeshopoverwhelming.
Theywouldliketohaveathirdshareholderinvolvedtotakeoversomeoftheresponsibilitiesofrunningasmall
business.BothfeelthatNatalieandCurtisareentrepreneurialinspiritandthattheirexpertisewouldbea
welcomeadditiontothebusinessoperation.Thetwinshavealsosaidthattheyplantooperatethisbusinessfor
another10yearsandthenretire.
KenhasmetwithCurtisandNatalietodiscussthebusinessoperation.Theyhaveconcludedthattherewouldbe
manyadvantagesforCookie&CoffeeCreationsInc.toacquireaninterestinTheBeaneryCoffee.Oneofthe
majoradvantageswouldbevolumediscountsforpurchasesofthecoffeebeaninventory.
Despitetheapparentadvantages,NatalieandCurtisarestillnotconvincedthattheyshouldparticipateinthis
businessventure.Theycometoyouwiththefollowingquestions.
1. WearealittleconcernedabouthowmuchinfluencewewouldhaveinthedecisionmakingprocessforThe
BeaneryCoffee.Wouldtheamountofinfluencewehaveaffecthowwewouldaccountforthisinvestment?
2. Canyouthinkofotheradvantagesofgoingaheadwiththisinvestment?
3. Canyouthinkofanydisadvantagesofgoingaheadwiththisinvestment?
Instructions
(a) AnswerNatalieandCurtissquestions.
(b) AssumethatKenwantstosellhis1,000sharesofTheBeaneryCoffeefor$15,000.Preparethejournal
entryrequiredifCookie&CoffeeCreationsInc.buysKensshares.
(c) AssumethatCookie&CoffeeCreationsInc.buysthesharesandinthefollowingyear.TheBeaneryCoffee
earns$50,000netincomeandpays$25,000individends.Preparethejournalentriesrequiredunderboththe
costmethodandtheequitymethodofaccountingforthisinvestment.

(D) IDENTIFYWHERETHISINVESTMENTWOULDBE
CLASSIFIEDONTHEBALANCESHEETOFCOOKIE&COFFEE
CREATIONSINC.ANDEXPLAINWHY.WHATAMOUNT
WOULDAPPEARONTHEBALANCESHEETUNDEREACHOF
THEMETHODSOFACCOUNTINGFORTHEINVESTMENT?

CONTINUINGCOOKIECHRONICLE

(Note:ThisisacontinuationoftheCookieChroniclefromChapters1through12.)
CCC13NataliehaspreparedthebalancesheetandincomestatementofCookie&CoffeeCreationsInc.forthe
firstyearofoperations,butdoesnotunderstandhowtopreparethecashflowstatement.Theincomestatement
andbalancesheetappearbelow.RecallthatthecompanystartedoperationsonNovember1,2011,soallofthe
openingbalancesarezero.
Additionalinformation:
1. Thecompanyboughtkitchenequipment(acommercialoven)for$17,000onNovember1,2011,andsigned
a$12,000notepayabletohelppayforit.Thetermsprovideforsemiannualfixedprincipalpaymentsof$2,000
onMay1andNovember1ofeachyear,plusinterestof5%.Allotherfurniture,fixture,andequipmentwere
purchasedduringtheyearforcash.
2. RECALLFROMCHAPTER11THATTHECOMPANYORIGINALLYISSUED

25,930COMMONSHARESFOR$25,930,OFWHICH750SHARESWERE
REPURCHASEDFROMTHELAWYERFOR$500.
COOKIE&COFFEECREATIONSINC.

IncomeStatementYearEndedOctober31,2012
Sales
$462,500
Costofgoodssold
231,250
Grossprofit
231,250
Operatingexpenses
Salariesandwagesexpense
$92,500
Depreciationexpense 9,850
Otheroperatingexpenses
35,987
Incomefromoperations
92,913
Otherexpenses
Interestexpense
413
Incomebeforeincometax
Incometaxexpense
18,500

138,337

92,500

NETINCOME

$74,000

COOKIE&COFFEECREATIONSINC.

BalanceSheetOctober31,2012
Assets
Currentassets
Cash
$32,219
Accountsreceivable
3,250
Inventory
17,897
Prepaidexpenses
6,300
Property,plant,andequipment
Furnitureandfixtures $12,500
Accumulateddepreciationfurnitureandfixtures
Computerequipment 4,200
Accumulateddepreciationcomputerequipment(600)
Kitchenequipment
83,000
Accumulateddepreciationkitchenequipment(8,300)
Totalassets

LiabilitiesandStockholdersEquity
Currentliabilities
Accountspayable
Incometaxpayable
Dividendspayable
Salariespayable

$5,848
18,500
700
2,250

$59,666
(1,250) 11,250
3,600
75,000 89,850
$149,516

Interestpayable
188
Notepayablecurrentportion
4,000
Longtermliabilities
Notepayablelongtermportion
Totalliabilities
37,486
Stockholdersequity
Paidincapital
Preferredstock,2,800sharesissuedandoutstanding
$14,000
Commonstock,25,930sharesissued,25,180outstanding 25,930
Retainedearnings
72,600
Totalpaidincapitalandretainedearnings
112,530
Less:Treasurystockcommon(750shares),atcost
Totalstockholdersequity
Totalliabilitiesandstockholdersequity

$31,486
6,000

39,930
(500)
112,030
$149,516

3. RecallfromChapter11thatthecompanydeclaredasemiannualdividendtothepreferredstockholderson
April30,andthedividendwaspaidonJune1.Thesecondsemiannualdividendwasdeclaredtothepreferred
stockholdersonOctober31,tobepaidonDecember1.
4. Prepaidexpensesrelateonlytooperatingexpenses.
Instructions
(a) PrepareastatementofcashflowsforCookie&CoffeeCreationsInc.fortheyearendedOctober31,2012,
usingtheindirectmethod.

(B) PREPAREASTATEMENTOFCASHFLOWSFORCOOKIE
&COFFEECREATIONSINC.FORTHEYEARENDEDOCTOBER
31,2012,USINGTHEDIRECTMETHOD.
CONTINUINGCOOKIECHRONICLE

(Note:ThisisacontinuationoftheCookieChroniclefromChapters1through13.)
CCC14ThebalancesheetandincomestatementofCookie&CoffeeCreationsInc.foritsfirstyearof
operations,theyearendedOctober31,2012,follows.
Additionalinformation:
NatalieandCurtisarethinkingaboutborrowinganadditional$20,000tobuymorekitchenequipment.Theloan
wouldberepaidovera4yearperiod.Thetermsoftheloanprovideforequalsemiannualinstallmentpayments
of$2,500onMay1andNovember1ofeachyear,plusinterestof5%ontheoutstandingbalance.Dividendson
preferredstockwere$1,250.Sincethisisthefirstyearofoperationsandthebeginningbalancesarezero,usethe
endingbalanceastheaveragebalancewhereappropriate.
Instructions
(a) Calculatethefollowingratios.
1.Currentratio
6.Grossprofitrate
2.Receivablesturnover
7.Profitmargin
3.Inventoryturnover
8.Assetturnover
4.Debttototalassets
9.Returnonassets
5.Timesinterestearned
10.Returnoncommonstockholdersequity
(b) Commentonyourfindingsfrompart(a).
(c) Basedonyouranalysisinparts(a)and(b),doyouthinkabankwouldlendCookie&CoffeeCreations
Inc.$20,000tobuytheadditionalequipment?Explainyourreasoning.

(D) WHATALTERNATIVESCOULDCOOKIE&COFFEECREATIONSCONSIDER
INSTEADOFBANKFINANCING?
COOKIE&COFFEECREATIONSINC.
BalanceSheet
October31,2012

Assets

Currentassets
Cash
Accountsreceivable
Merchandiseinventory
Prepaidexpenses

Property,plant,andequipment
Furnitureandfixtures$12,500
Accumulateddepreciationfurnitureandfixtures
Computerequipment4,200
Accumulateddepreciationcomputerequipment
Kitchenequipment83,000
Accumulateddepreciationkitchenequipment

$32,219
3,250
17,897
6,300 $59,666
1,250

11,250

600

3,600

8,000

75,00089,850

Totalassets

$149,516

LiabilitiesandStockholdersEquity

Currentliabilities
Accountspayable

$5,848
Incometaxpayable
18,500
Dividendspayable
700
Salariespayable

2,250
Interestpayable
188
Notepayablecurrentportion
4,000$31,486
Longtermliabilities
Notepayablelongtermportion
6,000
Totalliabilities
37,486
StockholdersequityPaidincapital
Preferredstock,2,800sharesissued
$14,000Commonstock,25,930sharesissued,
25,180outstanding
25,930 39,930
Retainedearnings
72,600
Totalpaidincapitalandretainedearnings
112,530
Less:Treasurystockcommon(750shares),atcost
(500)
Totalstockholdersequity
112,030

Totalliabilitiesandstockholdersequity
$149,516

COOKIE&COFFEECREATIONSINC.
IncomeStatementYearEndedOctober31,2012

Sales

Costofgoodssold
Grossprofit
Operatingexpenses
Salariesandwagesexpense
Depreciationexpense9,850
Otheroperatingexpenses
Incomefromoperations
Otherexpenses
Interestexpense
Incomebeforeincometax
Incometaxexpense
Netincome

$462,500

231,250
231,250
$92,500

35,987138,337
92,913
413
92,500
18,500
$74,000