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Accounting Covering Most Concepts Question

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Accounting question covering most concepts.

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 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. 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 that 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 listed below.

Curtis’s Coffee Cookie Creations

Cash $7,130 $12,000

Accounts receivable 100 800

Inventory 450 1,200

Equipment 2,500 1,000*

*Cookie Creations decided not to buy the delivery van considered in Unit II.

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.

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Natalie and Curtis are very excited about this new business venture, so they have come to you with the

questions below.

Curtis’s dad and Natalie’s 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?

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 we are a bit worried about accounting for this transaction. Can

we do this? If so, how do we determine how many shares to give her?

ANSWER:

Assests Bought by Curtis & Shares Issued

Date

Account title for Curtis

Debit

Credit

1st November, 2020

Cash

$ 7130

Account Receivables

$ 100

Inventory

$ 450

Equipment

$ 2500

Common Stock

$ 10180

Therefor, 10180 shares issued to Curtis

Assests Bought by Natalie & Shares Issued

Date

Account title for Natalie

Debit

Credit

1st November, 2020

Cash

$ 12000

Account Receivables

$ 800

Inventory

$ 1200

Equipment

$ 1000

Common Stock

$ 15000

Therefor, 15000 shares issued to Natalie

Assests Bought by Natalie and Curtis together & Shares Issued

Date

Account title for Natalie & Curtis

Debit

Credit

1st November, 2020

Cash

$ 19130

Account Receivables

$ 900

Inventory

$ 1650

Equipment

$ 3500

Common Stock

$ 25180

Therefore, 25180 shares issued in total, inclusive of Natalie & Curtis

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Accounting question covering most concepts. 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 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. 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 that Curtis currently rents to give her cooking-making classes and demonstrations of the mixers that she sells. Natalie will al ...
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Tags: business partnership Cookie Creations Coffee shop Personal Liability supervise staff