Continuing Cookie Chronicle 1 Continuing Cookie Chronicle CCC1 Natalie Koebel spent much of her childhood learning the art of cookie-making from her grandmother. They passed many happy hours mastering every type of cookie imaginable and later creating new recipes that were both healthy and delicious. Now at the start of her second year in college, Natalie is investigating various possibilities for starting her own business as part of the requirements of the entrepreneurship program in which she is enrolled. A long-time friend insists that Natalie has to somehow include cookies in her business plan. After a series of brainstorming sessions, Natalie settles on the idea of operating a cookie-making school. She will start on a part-time basis and offer her services in people’s homes. Now that she has started thinking about it, the possibilities seem endless. During the fall, she will concentrate on holiday cookies. She will offer individual lessons and group sessions (which will probably be more entertainment than education for the participants). Natalie also decides to include children in her target market. The first difficult decision is coming up with the perfect name for her business. In the end, she settles on “Cookie Creations” and then moves on to more important issues. Instructions (a) What form of business organization—proprietorship, partnership, or corporation— do you recommend that Natalie use for her business? Discuss the benefits and weaknesses of each form and give the reasons for your choice. (b) Will Natalie need accounting information? If yes, what information will she need and why? How often will she need this information? (c) Identify specific asset, liability, and equity accounts that Cookie Creations will likely use to record its business transactions. (d) Should Natalie open a separate bank account for the business? Why or why not? 2 Continuing Cookie Chronicle CCC2 After researching the different forms of business organization, Natalie Koebel decides to operate “Cookie Creations” as a corporation. She then starts the process of getting the business running. In November 2014, the following activities take place. Nov. 8 8 11 13 14 16 17 20 25 30 Natalie cashes her government bonds and receives $520, which she deposits in her personal bank account. She opens a bank account under the name “Cookie Creations” and transfers $500 from her personal account to the new account in exchange for ordinary shares. Natalie pays $65 to have advertising brochures and posters printed. She plans to distribute these as opportunities arise. (Hint: Use Advertising Expense.) She buys baking supplies, such as flour, sugar, butter, and chocolate chips, for $125 cash. Natalie starts to gather some baking equipment to take with her when teaching the cookie classes. She has an excellent top-of-the-line food processor and mixer that originally cost her $750. Natalie decides to start using it only in her new business. She estimates that the equipment is currently worth $300. She invests the equipment in the business in exchange for ordinary shares. Natalie realizes that her initial cash investment is not enough. Her grandmother lends her $2,000 cash, for which Natalie signs a note payable in the name of the business. Natalie deposits the money in the business bank account. (Hint: The note does not have to be repaid for 24 months. As a result, the notes payable should be reported in the accounts as the last liability and also on the statement of financial position as a non-current liability.) She buys more baking equipment for $900 cash. She teaches her first class and collects $125 cash. Natalie books a second class for December 4 for $150. She receives $30 cash in advance as a down payment. Natalie pays $1,320 for a one-year insurance policy that will expire on December 1, 2015. Instructions (a) Prepare journal entries to record the November transactions. (b) Post the journal entries to general ledger accounts. (c) Prepare a trial balance at November 30. Continuing Cookie Chronicle 3 CCC3 It is the end of November and Natalie has been in touch with her grandmother. Her grandmother asked Natalie how well things went in her first month of business. Natalie, too, would like to know if the company has been profitable or not during November. Natalie realizes that in order to determine Cookie Creations’ income, she must first make adjustments. Natalie puts together the following additional information. 1. A count reveals that $35 of baking supplies were used during November. 2. Natalie estimates that all of her baking equipment will have a useful life of 5 years or 60 months and no salvage value. (Assume Natalie decides to record a full month’s worth of depreciation, regardless of when the equipment was obtained by the business.) 3. Natalie’s grandmother has decided to charge interest of 6% on the note payable extended on November 16. The loan plus interest is to be repaid in 24 months. (Assume that half a month of interest accrued during November.) 4. On November 30, a friend of Natalie’s asks her to teach a class at the neighborhood school. Natalie agrees and teaches a group of 35 first-grade students how to make Santa Claus cookies. The next day, Natalie prepares an invoice for $300 and leaves it with the school principal. The principal says that he will pass the invoice along to the head office, and it will be paid sometime in December. 5. Natalie receives a utilities bill for $45. The bill is for utilities consumed by Natalie’s business during November and is due December 15. Instructions Using the information that you have gathered through Chapter 2, and based on the new information above, do the following. (a) Prepare and post the adjusting journal entries. (b) Prepare an adjusted trial balance. (c) Using the adjusted trial balance, calculate Cookie Creations’ net income or net loss for the month of November. Do not prepare an income statement. 4 Continuing Cookie Chronicle CCC4 Natalie had a very busy December. At the end of the month, after journalizing and posting the December transactions and adjusting entries, Natalie prepared the following adjusted trial balance. Cookie Creations Adjusted Trial Balance December 31, 2014 Debit Cash $1,180 Accounts Receivable 875 Supplies 350 Prepaid Insurance 1,210 Equipment 1,200 Accumulated Depreciation—Equipment Accounts Payable Salaries and Wages Payable Notes Payable Unearned Service Revenue Interest Payable Share Capital-Ordinary Dividends 500 Service Revenue Salaries and Wages Expense 1,006 Utilities Expense 125 Advertising Expense 165 Supplies Expense 1,025 Depreciation Expense 40 Insurance Expense 110 Interest Expense 15 $7,801 Credit $ 40 75 56 2,000 300 15 800 4,515 $7,801 Instructions Using the information in the adjusted trial balance, do the following. (a) Prepare an income statement and a retained earnings statement for the 2 months ended December 31, 2014, and a classified statement of financial position at December 31, 2014. The note payable has a stated interest rate of 6%, and the principal and interest are due on November 16, 2016. (b) Natalie has decided that her year-end will be December 31, 2014. Prepare closing entries as of December 31, 2014. (c) Prepare a post-closing trial balance. Continuing Cookie Chronicle 5 CCC5 Because Natalie has had such a successful first few months, she is considering other opportunities to develop her business. One opportunity is the sale of fine European mixers. The owner of Kzinski Supply Co. has approached Natalie to become the exclusive distributor of these fine mixers in her state. The current cost of a mixer is approximately $575, and Natalie would sell each one for $1,150. Natalie comes to you for advice on how to account for these mixers. Each appliance has a serial number and can be easily identified. Natalie asks you the following questions. 1. “Would you consider these mixers to be inventory? Or should they be classified as supplies or equipment?” 2. “I’ve learned a little about keeping track of inventory using both the perpetual and the periodic systems of accounting for inventory. Which system do you think is better? Which one would you recommend for the type of inventory that I want to sell?” 3. “How often do I need to count inventory if I maintain it using the perpetual system? Do I need to count inventory at all?” In the end, Natalie decides to use the perpetual inventory system. The following transactions happen during the month of January. Jan. 4 6 7 8 12 14 14 17 18 20 28 28 30 31 31 Bought five deluxe mixers on account from Kzinski Supply Co. for $2,875, FOB shipping point, terms n/30. Paid $100 freight on the January 4 purchase. Returned one of the mixers to Kzinski because it was damaged during shipping. Kzinski issues Cookie Creations credit for the cost of mixer plus $20 for the cost of freight that was paid on January 6 for one mixer. Collected $375 of the accounts receivable from December 2014. Three deluxe mixers are sold on account for $3,450, FOB destination, terms n/30. (Cost of goods sold is $595 per mixer.) Paid the $75 of delivery charges for the three mixers that were sold on January 12. Bought four deluxe mixers on account from Kzinski Supply Co. for $2,300, FOB shipping point, terms n/30. Natalie is concerned that there is not enough cash available to pay for all of the mixers purchased. She invests an additional $1,000 cash in Cookie Creations in exchange for ordinary shares. Paid $80 freight on the January 14 purchase. Sold two deluxe mixers for $2,300 cash. (Cost of goods sold is $595 per mixer.) Natalie issued a check to her assistant for all the help the assistant has given her during the month. Her assistant worked 20 hours in January and is also paid the $56 owed at December 31, 2014. Ignore payroll taxes. (Natalie’s assistant earns $8 an hour.) Collected the amounts due from customers for the January 12 transaction. Paid a $145 utility bill ($75 for the December 2014 account payable and $70 for the month of January). Paid Kzinski all amounts due. Cash dividends of $750 are paid. As of January 31, the following adjusting entry data is available. 1. A count of baking supplies reveals that none were used in January. 2. Another month’s worth of depreciation needs to be recorded on the baking equipment bought in November. (Recall that the baking equipment has a useful life of 5 years or 60 months and no salvage value.) 3. An additional month’s worth of interest on her grandmother’s loan needs to be accrued. (The interest rate is 6%.) 4. During the month, $110 of insurance has expired. 5. An analysis of the unearned service revenue account reveals that Natalie has not had time to teach any of these lessons this month because she has been so busy selling mixers. As a result, there is no change to the unearned service revenue account. Natalie hopes to complete the remaining lessons in February. 6. An inventory count of mixers at the end of January reveals that Natalie has three mixers remaining. 6 Continuing Cookie Chronicle Instructions Using the information from previous chapters and the new information above, do the following. (a) Answer Natalie’s questions. (b) Prepare and post the January 2015 transactions. (c) Prepare a trial balance. (d) Prepare and post the adjusting journal entries required. (e) Prepare an adjusted trial balance. (f) Prepare an income statement for the month ended January 31, 2015. Continuing Cookie Chronicle 7 CCC6 Natalie is busy establishing both divisions of her business (cookie classes and mixer sales) and completing her business degree. Her goals for the next 11 months are to sell one mixer per month and to give two to three classes per week. The cost of the fine European mixers is expected to increase. Natalie has just negotiated new terms with Kzinski that include shipping costs in the negotiated purchase price (mixers will be shipped FOB destination). Assume that Natalie has decided to use a periodic inventory system and now must choose a cost flow assumption for her mixer inventory. The following transactions occur in February to May 2015. Feb. 2 Natalie buys two deluxe mixers on account from Kzinski Supply Co. for $1,200 ($600 each), FOB destination, terms n/30. 16 She sells one deluxe mixer for $1,150 cash. 25 She pays the amount owed to Kzinski. Mar. 2 She buys one deluxe mixer on account from Kzinski Supply Co. for $618, FOB destination, terms n/30. 30 Natalie sells two deluxe mixers for a total of $2,300 cash. 31 She pays the amount owed to Kzinski. Apr. 1 She buys two deluxe mixers on account from Kzinski Supply Co. for $1,224 ($612 each), FOB destination, terms n/30. 13 She sells three deluxe mixers for a total of $3,450 cash. 30 Natalie pays the amounts owed to Kzinski. May 4 She buys three deluxe mixers on account from Kzinski Supply Co. for $1,875 ($625 each), FOB destination, terms n/30. 27 She sells one deluxe mixer for $1,150 cash. Instructions (a) Determine the cost of goods available for sale. Recall from Chapter 5 that at the end of January, Cookie Creations had three mixers on hand at a cost of $595 each. (b) (i) Calculate the ending inventory under the FIFO and average cost methods, (ii) Calculate the cost of goods sold under the FIFO and average cost methods, (iii) Calculate the gross profit under the FIFO and average cost methods, and (iv) Calculate the gross profit rate under the FIFO and average cost methods. 8 Continuing Cookie Chronicle CCC7 Part 1 Natalie is struggling to keep up with the recording of her accounting transactions. She is spending a lot of time marketing and selling mixers and giving her cookie classes. Her friend John is an accounting student who runs his own accounting service. He has asked Natalie if she would like to have him do her accounting. John and Natalie meet and discuss her business. John suggests that he do the following for Natalie. 1. 2. 3. 4. 5. 6. 7. 8. Hold cash until there is enough to be deposited. (He would keep the cash locked up in his vehicle). He would also take all of the deposits to the bank at least twice a month. Write and sign all of the checks. Record all of the deposits in the accounting records. Record all of the checks in the accounting records. Prepare the monthly bank reconciliation. Transfer all of Natalie’s manual accounting records to his computer accounting program. John maintains all of the accounting information that he keeps for his clients on his laptop computer. Prepare monthly financial statements for Natalie to review. Write himself a check every month for the work he has done for Natalie. Instructions Identify the weaknesses in internal control that you see in the system John is recommending. Can you suggest any improvements if Natalie hires John to do the accounting? CCC7 Part 2 Natalie decides that she cannot afford to hire John to do her accounting. One way that she can ensure that her cash account does not have any errors and is accurate and up-to-date is to prepare a bank reconciliation at the end of each month. Natalie would like you to help her. She asks you to prepare a bank reconciliation for June 2015 using the following information. GENERAL LEDGER—COOKIE CREATIONS Cash Date 2015 June 1 1 3 3 8 9 13 20 28 28 Explanation Ref. Debit Credit Balance 750 Check #600 Check #601 Check #302 625 95 56 1,050 Check #603 425 155 Check #604 297 110 Balance 2,657 3,407 2,782 2,687 2,631 3,681 3,256 3,411 3,114 3,224 Continuing Cookie Chronicle 9 PREMIER BANK Statement of Account—Cookie Creations June 30, 2015 Date May 31 June 1 6 6 8 9 10 10 14 20 23 28 30 Explanation Balance Deposit Check #600 Check #601 Check #602 Deposit NSF Check NSF Fee Check #603 Deposit EFT – Telus Check #599 Bank charges Checks and Other Debits Deposits 750 625 95 56 1,050 100 35 452 125 85 361 13 Balance 3,256 4,066 3,381 3,286 3,230 4,280 4,180 4,145 3,693 3,818 3,733 3,372 3,359 Additional information: 1. On May 31, there were two outstanding checks: #595 for $238 and #599 for $361. 2. Premier Bank made a posting error to the bank statement: check #603 was issued for $425, not $452. 3. The deposit made on June 20 was for $125 that Natalie received for teaching a class. Natalie made an error in recording this transaction. 4. The electronic funds transfer (EFT) was for Natalie’s utilities expense. 5. The NSF check was from Ron Black. Natalie received this check for teaching a class to Ron’s children. Natalie contacted Ron, and he assured her that she will receive a check in the mail for the outstanding amount of the invoice and the NSF bank charge. Instructions (a) Prepare Cookie Creations’ bank reconciliation for June 30. (b) Prepare any necessary adjusting entries at June 30. (c) If a statement of financial position is prepared for Cookie Creations at June 30, what balance will be reported as cash in the current assets section? 10 Continuing Cookie Chronicle CCC8 One of Natalie’s friends, Curtis Lesperance, runs a coffee shop where he sells specialty coffees and prepares and sells muffins and cookies. He is eager to buy one of Natalie’s fine European mixers, which would enable him to make larger batches of muffins and cookies. However, Curtis cannot afford to pay for the mixer for at least 30 days. He asks Natalie if she would be willing to sell him the mixer on credit. Natalie comes to you for advice. She asks the following questions. 1. “Curtis has given me a set of his most recent financial statements. What calculations should I make with the data from these statements, and what questions should I ask him after I have analyzed the statements? How will this information help me decide if I should extend credit to Curtis?” 2. “Is there an alternative other than extending credit to Curtis for 30 days?” 3. “I am thinking seriously about being able to have my customers use credit cards. What are some of the advantages and disadvantages of letting my customers pay by credit card?” The following transactions occurred in June through August 2015. June 1 After much thought, Natalie sells a mixer to Curtis on credit, terms n/30, for $1,150 (cost of mixer $620). 30 Curtis calls Natalie. He is unable to pay the amount outstanding for another month, so he signs a one-month, 8.25% note receivable. July 31 Curtis calls Natalie. He indicates that he is unable to pay today but hopes to have a check for her at the end of the week. Natalie prepares the journal entry to record the dishonoring of the note. She assumes she will be paid within a week. Aug. 7 Natalie receives a check from Curtis in payment of his balance owed. Instructions (a) Answer Natalie’s questions. (b) Prepare journal entries for the transactions that occurred in June, July, and August. (The company uses a perpetual inventory system). Round calculations to nearest dollar. Continuing Cookie Chronicle 11 CCC9 Natalie is thinking of buying a van that will be used only for business. The cost of the van is estimated at $36,500. Natalie would spend an additional $2,500 to have the van painted. In addition, she wants the back seat of the van removed so that she will have lots of room to transport her mixer inventory as well as her baking supplies. The cost of taking out the back seat and installing shelving units is estimated at $1,500. She expects the van to last about 5 years, and she expects to drive it for 200,000 miles. The annual cost of vehicle insurance will be $2,400. Natalie estimates that at the end of the 5-year useful life the van will sell for $7,500. Assume that she will buy the van on August 15, 2015, and it will be ready for use on September 1, 2015. Natalie is concerned about the impact of the van’s cost on her income statement and statement of financial position. She has come to you for advice on calculating the van’s depreciation. Instructions (a) Determine the cost of the van. (b) Prepare three depreciation tables for 2015, 2016, and 2017: one for straight-line depreciation (similar to the one in Illustration 9-9), one for double-declining balance depreciation (Illustration 9-13), and one for unitsof-activity depreciation (Illustration 9-11). For units-of activity, Natalie estimates she will drive the van as follows: 15,000 miles in 2015; 45,000 miles in 2016; 50,000 miles in 2017; 45,000 miles in 2018; 35,000 miles in 2019; and 10,000 miles in 2020. Recall that Cookie Creations has a December 31 year-end. (c) What impact will the three methods of depreciation have on Natalie’s statement of financial position at December 31, 2015? What impact will the three methods have on Natalie’s income statement in 2015? (d) What impact will the three methods of depreciation have on Natalie’s income statement over the van’s total 5-year useful life? (e) What method of depreciation would you recommend Natalie use? 12 Continuing Cookie Chronicle CCC10 Natalie is thinking of repaying all amounts outstanding to her grandmother. Recall that Cookie Creations borrowed $2,000 on November 16, 2014, from Natalie’s grandmother. Interest on the note is 6% per year, and the note plus interest was to be repaid in 24 months. Recall that a monthly adjusting journal entry was prepared for the months of November 2014 (1/2 month), December 2014, and January 2015. Instructions (a) Calculate the interest payable that was accrued and recorded to July 31, 2015, assuming monthly adjusting entries were made. (b) Prepare the journal entry at August 31, 2015, to record one month’s accrued interest. (c) Natalie repays her grandmother on September 15, 2015—10 months after her grandmother extended the loan to Cookie Creations. Prepare the journal entry for the loan repayment. Continuing Cookie Chronicle 13 CCC11 Natalie and her friend Curtis Lesperance decide that they can benefit from joining Cookie Creations and Curtis’s coffee shop. In the first part of this problem, they come to you with questions about setting up a corporation for their new business. In the second part of the problem, they want your help in preparing financial information following the first year of operations of their new business, Cookie & Coffee Creations. CCC11 Part 1 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 Cookie Creations Cash $7,500 $11,630 Accounts receivable 100 800 Inventory 450 1,200 Equipment 2,500 1,000* *Cookie Creations decided not to buy the delivery van considered in Chapter 9. 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, 2015, 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: ordinary shares and preference shares. They authorize 100,000 no-par shares of ordinary shares, and 10,000 no-par shares of preference shares with a $0.50 non-cumulative dividend. The assets held by each of their businesses will be transferred into the corporation at current market value. Curtis will receive 10,550 ordinary shares, and Natalie will receive 14,630 ordinary 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: 1. “Curtis’s dad and Natalie’s grandmother are interested in investing $5,000 each in the business venture. We are thinking of issuing them preference shares. What would be the advantage of issuing them preference shares instead of ordinary shares?” 2. “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 ordinary shares in our new corporation instead of cash for her services. We would be happy to issue her shares, but we’re a bit worried about accounting for this transaction. Can we do this? If so, how do we determine how many shares to give her?” Instructions (a) Answer their questions. (b) Prepare the journal entries required on November 1, 2015, the date when Natalie and Curtis transfer the assets of their respective businesses into Cookie & Coffee Creations Inc. (c) Assume that Cookie & Coffee Creations Inc. issues 1,000 $0.50 non-cumulative preference 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 ordinary shares to its lawyer. Prepare the journal entries for each of these transactions. They all occurred on November 1. (d) Prepare the opening statement of financial position for Cookie & Coffee Creations Inc. as of November 1, 2015, including the journal entries in (b) and (c) above. 14 Continuing Cookie Chronicle CCC11 Part 2 After establishing their company’s fiscal year-end to be October 31, Natalie and Curtis begin operating Cookie & Coffee Creations Inc. on November 1, 2015. On that date, after the issuance of shares, the equity section of the company’s statement of financial position is as follows. Equity Share capital - preference, $0.50 non-cumulative, no par value, 10,000 shares authorized, 2,000 issued Share capital - ordinary, no par value, 100,000 shares authorized, 25,930 issued $10,000 25,930 Cookie & Coffee Creations then has the following selected transactions during its first year of operations. Dec. 1 Apr. 30 June 30 Oct. 31 31 31 Issues an additional 800 preference shares to Natalie’s brother for $4,000. Declares a semiannual dividend to the preference shareholders of record on May 15, payable on June 1. Repurchases 750 ordinary shares issued to the lawyer, for $500. Recall that these were originally issued for $750. The lawyer had decided to retire and wanted to liquidate all of her assets. The company has had a very successful first year of operations. It earned revenues of $462,500 and incurred expenses of $364,050 (including $750 legal fee, but excluding income tax). Records income tax expense. (The company has a 20% income tax rate.) Declares a semiannual dividend to the preference shareholders of record on November15, payable on December 1. Instructions (a) Prepare the journal entries to record the above transactions. (b) Prepare the retained earnings statement for the year. (c) Prepare the equity section of the statement of financial position as of October 31. (d) Prepare closing entries. (e) Calculate the earnings per share. Assume weighted-average shares of 25,680. Continuing Cookie Chronicle 15 CCC12 Natalie has been approached by Ken Thornton, a shareholder in The Beanery Coffee Inc. Ken wants to retire and would like to sell his 1,000 shares in The Beanery Coffee, which represent 30% of all shares issued. The Beanery is currently operated by Ken’s twin daughters, each of whom owns 35% of the ordinary shares. The Beanery not only operates a coffee shop but also roasts and sells beans to retailers, under the name “Rocky Mountain Beanery.” The business has been operating for approximately five years. In the last two years Ken has lost interest and left the day-to-day operations to his daughters. Both daughters at times find the work at the coffee shop overwhelming. They would like to have a third shareholder involved to take over some of the responsibilities of running a small business. Both feel that Natalie and Curtis are entrepreneurial in spirit and that their expertise would be a welcome addition to the business operation. The twins have also said that they plan to operate this business for another ten years and then retire. Ken has met with Curtis and Natalie to discuss the business operation. They have concluded that there would be many advantages for Cookie & Coffee Creations Inc. to acquire an interest in The Beanery Coffee. One of the major advantages would be volume discounts for purchases of the coffee bean inventory. Despite the apparent advantages, Natalie and Curtis are still not convinced that they should participate in this business venture. They come to you with the following questions. 1. “We are a little concerned about how much influence we would have in the decision-making process for The Beanery Coffee. Would the amount of influence we have affect how we would account for this investment?” 2. “Can you think of other advantages of going ahead with this investment?” 3. “Can you think of any disadvantages of going ahead with this investment?” Instructions (a) Answer Natalie and Curtis’s questions. (b) Assume that Ken wants to sell his 1,000 shares of The Beanery Coffee for $15,000. Prepare the journal entry required if Cookie & Coffee Creations Inc. buys Ken’s shares. (c) Assume that Cookie & Coffee Creations Inc. buys the shares and in the following year, The Beanery Coffee earns $50,000 net income and pays $25,000 in dividends. Prepare the journal entries required under both the cost method and the equity method of accounting for this investment. (d) Identify where this investment would be classified on the statement of financial position of Cookie & Coffee Creations Inc. and explain why. What amount would appear on the statement of financial position under each of the methods of accounting for the investment? 16 Continuing Cookie Chronicle CCC13 Natalie has prepared the statement of financial position and income statement of Cookie & Coffee Creations Inc. for the first year of operations, but does not understand how to prepare the cash flow statement. The income statement and statement of financial position appear below. Recall that the company started operations on November 1, 2015, so all of the opening balances are zero. Additional information: 1. The company bought kitchen equipment (a commercial oven) for $17,000 on November 1, 2015, and signed a $12,000 note payable to help pay for it. The terms provide for semiannual fixed principal payments of $2,000 on May 1 and November 1 of each year, plus interest of5%.All other furniture, fixture, and equipment were purchased during the year for cash. 2. Recall from Chapter 11 that the company originally issued 25,930 ordinary shares for $25,930, of which 750 shares were repurchased from the lawyer for $500. COOKIE & COFFEE CREATIONS INC. Income Statement Year Ended October 31, 2016 Sales Cost of goods sold Gross profit Operating expenses Salaries and wages expense Depreciation expense Other operating expenses Income from operations Interest expense Income before income tax Income tax expense Net income $462,500 231,250 231,250 $92,500 3,900 35,987 132,387 98,863 413 98,450 19,690 $ 78,760 COOKIE & COFFEE CREATIONS INC. Statement of Financial Position October 31, 2016 Assets Property, plant, and equipment Furniture and fixtures Accumulated depreciation— furniture and fixtures Computer equipment Accumulated depreciation— computer equipment Kitchen equipment Accumulated depreciation— kitchen equipment Current assets Prepaid expenses Inventory Accounts receivable Cash Total assets $12,500 (1,250) 4,200 11,250 (600) 29,000 3,600 (2,050) 26,950 $ 6,300 17,897 3,250 79,919 $ 41,800 107,366 $149,166 Continuing Cookie Chronicle 17 Equity and Liabilities Equity Share capital - preference, 2,800 shares issued, and outstanding $ 14,000 Share capital - ordinary, 25,930 shares issued, 25,180 outstanding 25,930 Retained earnings Less: Treasury shares—ordinary (750 shares), at cost Total equity Non-current liabilities Note payable—long-term portion Current liabilities Note payable—current portion $ 4,000 Accounts payable 5,848 Income tax payable 19,690 Dividends payable 7,000 Salaries and wages payable 2,250 Interest payable 188 Total liabilities Total equity and liabilities 3. 4. 39,930 64,760 500 104,190 $ 6,000 38,976 44,976 $149,166 Recall from Chapter 11 that the company declared a semiannual dividend to the preference shareholders on April 30, and the dividend was paid on June 1. The second semiannual dividend was declared to the preference shareholders on October 31, to be paid on December 1. Prepaid expenses relate only to operating expenses. Instructions (a) Prepare a statement of cash flows for Cookie & Coffee Creations Inc. for the year ended October 31, 2016, using the indirect method. (b) Prepare a statement of cash flows for Cookie & Coffee Creations Inc. for the year ended October 31, 2016, using the direct method. 18 Continuing Cookie Chronicle CCC14 The statement of financial position and income statement of Cookie & Coffee Creations Inc. for its first year of operations, the year ended October 31, 2016, follows. COOKIE & COFFEE CREATIONS INC. Statement of Financial Position October 31, 2016 Assets Property, plant, and equipment Furniture and fixtures Accumulated depreciation— furniture and fixtures Computer equipment Accumulated depreciation— computer equipment Kitchen equipment Accumulated depreciation— kitchen equipment Current assets Prepaid expenses Inventory Accounts receivable Cash Total assets $12,500 (1,250) 4,200 11,250 (600) 29,000 3,600 (2,050) 26,950 Equity and Liabilities Equity Share capital - preference, 2,800 shares issued and outstanding $ 14,000 Share capital - ordinary, 25,930 shares issued, 25,180 outstanding 25,930 Retained earnings Less: Treasury shares—ordinary (750 shares), at cost Total equity Non-current liabilities Note payable—long-term portion Current liabilities Note payable—current portion $ 4,000 Accounts payable 5,848 Income tax payable 19,690 Dividends payable 7,000 Salaries and wages payable 2,250 Interest payable 188 Total liabilities Total equity and liabilities $ 6,300 17,897 3,250 79,919 $ 41,800 107,366 $149,166 39,930 64,760 500 104,190 $ 6,000 38,976 44,976 $149,166 Continuing Cookie Chronicle 19 COOKIE & COFFEE CREATIONS INC. Income Statement Year Ended October 31, 2016 Sales Cost of goods sold Gross profit Operating expenses Salaries and wages expense Depreciation expense Other operating expenses Income from operations Interest expense Income before income tax Income tax expense Net income Instructions (a) 1. Calculate the current ratio 2. Calculate the receivables turnover 3. Calculate the inventory turnover 4. Calculate the debt to total assets 5. Calculate the times interest earned 6. 7. 8. 9. 10. $462,500 231,250 231,250 $92,500 3,900 35,987 132,387 98,863 413 98,450 19,690 $ 78,760 Calculate the gross profit rate Calculate the profit margin Calculate the asset turnover Calculate the return on assets Calculate the return on ordinary shareholders’ equity Round calculations to the nearest one decimal place. (b) (c) (d) Comment on your findings from part (a). Based on your analysis in parts (a) and (b), do you think a bank would lend Cookie & Coffee Creations Inc. $20,000 to buy the additional equipment? Explain your reasoning. What alternatives could Cookie & Coffee Creations consider instead of bank financing?