1 CCC1 Natalie Koebel spent much of her childhood learning the art of cookiemaking from her grandmother. They spent many happy hours mastering every type of cookie imaginable and later devised new recipes that were both healthy and delicious. Now at the start of her second year in college, Natalie is investigating possibilities for starting her own business as part of the entrepreneurship program in which she is enrolled. A long-time friend insists that Natalie has to 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 group sessions (which will probably be more entertainment than education) and individual lessons. Natalie also decides to include children in her target market. The first difficult decision is coming up with the perfect name for her business. She settles on Cookie Creations, and then moves on to more important issues. (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 that Natalie might consider. (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, revenue, and expense 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? (e) Natalie expects she will have to use her car to drive to people s homes and to pick up supplies, but she also needs to use her car for personal reasons. She recalls from her first-year accounting course something about keeping business and personal assets separate. She wonders what she should do for accounting purposes. What do you recommend?
1 (Note: This is a continuation of the Cookie Chronicle from Chapter 1.) CCC2 After investigating the different forms of business organization, Natalie Koebel decides to operate her business as a corporation, Cookie Creations Inc., and she begins the process of getting her business running. While at a trade show, Natalie is introduced to Gerry Richards, operations manager of Biscuits, a national food retailer. After much discussion, Gerry asks Natalie to consider being Biscuits major supplier of oatmeal chocolate chip cookies. He provides Natalie with the most recent copy of the financial statements of Biscuits. He expects that Natalie will need to supply Biscuits Watertown warehouse with approximately 1,500 dozen cookies a week. Natalie is to send Biscuits a monthly invoice, and she will be paid approximately 30 days from the date the invoice is received in Biscuits Chicago office. Natalie is thrilled with the offer. However, she has recently read in the newspaper that Biscuits has a reputation for selling cookies and donuts with high amounts of sugar and fat, and as a result, consumer demand for the company s products has decreased. Natalie has several questions. Answer the following questions for Natalie. (a) What type of information does each financial statement provide? (b) What financial statements would Natalie need in order to evaluate whether Biscuits will have enough cash to meet its current liabilities? Explain what to look for. (c) What financial statements would Natalie need in order to evaluate whether Biscuits will be able to survive over a long period of time? Explain what to look for. (d) What financial statement would Natalie need in order to evaluate Biscuits profitability? Explain what to look for. (e) Where can Natalie find out whether Biscuits has outstanding debt? How can Natalie determine whether Biscuits would be able to meet its interest and debt payments on any debts it has? (f) How could Natalie determine whether Biscuits pays a dividend? (g) In deciding whether to go ahead with this opportunity, are there other areas of concern that Natalie should be aware of?
1 (Note: This is a continuation of the Cookie Chronicle from Chapters 1 and 2.) CCC3 In November 2014, after having incorporated Cookie Creations Inc., Natalie begins operations. She has decided not to pursue the offer to supply cookies to Biscuits. Instead, she will focus on offering cooking classes. The following events occur. Nov. 8 Natalie cashes in her U.S. Savings Bonds and receives $520, which she deposits in her personal bank account. 8 Natalie opens a bank account for Cookie Creations Inc. 8 Natalie purchases $500 of Cookie Creations common stock. 11 Cookie Creations purchases paper and other office supplies for $95. (Use Supplies.) 14 Cookie Creations pays $125 to purchase baking supplies, such as flour, sugar, butter, and chocolate chips. (Use Supplies.) 15 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 $550. Natalie decides to start using it only in her new business. She estimates that the equipment is currently worth $300, and she transfers the equipment into the business in exchange for additional common stock. 16 The company needs more cash to sustain its operations. Natalie s grandmother lends the company $2,000 cash, in exchange for a two-year, 9% note payable. Interest and the principal are repayable at maturity. 17 Cookie Creations pays $900 for additional baking equipment. 18 Natalie schedules her first class for November 29. She will receive $100 on the date of the class. 25 Natalie books a second class for December 5 for $150. She receives a $60 cash down payment, in advance. 29 Natalie teaches her first class, booked on November 18, and collects the $100 cash. 30 Natalie s brother develops a website for Cookie Creations Inc. that the company will use for advertising. He charges the company $600 for his work, payable at the end of December. (Because the website is expected to have a useful life of two years before upgrades are needed, it should be treated as an asset called Website.) 30 Cookie Creations pays $1,200 for a one-year insurance policy. 30 Natalie teaches a group of elementary school students how to make Santa Claus cookies. At the end of the class, Natalie leaves an invoice for $300 with the school principal. The principal says that he will pass it along to the business office and it will be paid some time in December. 30 Natalie receives a $50 invoice for use of her cell phone. She uses the cell phone exclusively for Cookie Creations Inc. business. The invoice is for services provided in November, and payment is due on December 15.
(a) Prepare journal entries to record the November transactions. (b) Post the journal entries to the general ledger accounts. (c) Prepare a trial balance at November 30, 2014.
1 (Note: This is a continuation of the Cookie Chronicle from Chapters 1 through 4.) CCC5 Because Natalie has had such a successful first few months, she is considering other opportunities to develop her business. One opportunity is to become the exclusive distributor of a line of fine European mixers. The current cost of a mixer is approximately $550, and Natalie would sell each one for $1,100. 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 method of accounting for inventory, and the following transactions happen during the month of January. Jan. 4 She buys five deluxe mixers on account from Kzinski Supply Co. for $2,750, terms n/30. 6 She pays $100 freight on the January 4 purchase. 7 Natalie returns one of the mixers to Kzinski because it was damaged during shipping. Kzinski issues Cookie Creations credit for the cost of the mixer plus $20 for the cost of freight that was paid on January 6 for one mixer. 8 She collects the amount due from the neighborhood community center that was accrued at the end of December 2014. 12 She sells three deluxe mixers on account for $3,300, FOB destination, terms n/30. The mixers cost $570 each (including freight). 13 Natalie pays her cell phone bill previously accrued in the December adjusting journal entries. 14 She pays $75 of delivery charges for the three mixers that were sold on January 12. 14 She buys four deluxe mixers on account from Kzinski Supply Co. for $2,200, terms n/30. 17 Natalie is concerned that there is not enough cash available to pay for all of the mixers purchased. She issues additional common stock for $1,000. 18 She pays $80 freight on the January 14 purchase. 20 She sells two deluxe mixers for $2,200 cash. 28 Natalie issues a check to her assistant. Her assistant worked 20 hours in January and is also paid for amounts owing at December 31, 2014. Recall that Natalie s assistant earns $8 an hour. 28 Natalie collects amounts due from customers in the January 12 transaction. 31 She pays Kzinski all amounts due. 31 Cash dividends of $750 are paid.
As of January 31, the following adjusting entry data are available. 1. A count of brochures and posters reveals that none were used in January. 2. A count of baking supplies reveals that none were used in January. 3. 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.) 4. One month s worth of amortization (write-off) needs to be recorded on the website. (Recall that the website has a useful life of 2 years or 24 months.) 5. An additional month s worth of interest on her grandmother s loan needs to be accrued. (The interest rate is 9%.) 6. One month s worth of insurance has expired. 7. Natalie receives her cell phone bill, $75. The bill is for services provided in January and is due February 15. (Recall that the cell phone is used only for business purposes.) 8. An analysis of the unearned 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 revenue account. Natalie hopes to book the outstanding lessons in February. 9. An inventory count of mixers at the end of January reveals that Natalie has three mixers remaining. Using the information that you have gathered and the general ledger accounts that you have prepared through Chapter 4, plus 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 a multiple-step income statement and retained earnings statement for the month ended January 31, 2015. (g) Prepare a classified balance sheet as of January 31, 2015. (c) Totals 12,434 (f) Net income 2,180 (g) Total assets 8,414
1 (Note: This is a continuation of the Cookie Chronicle from Chapters 1 through 5.) 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), but the supplier cannot guarantee the invoice price. Natalie has decided to use a periodic inventory system and now must choose a cost flow assumption for her mixer inventory. Feb. Mar. Apr. 1 The following transactions occur in February to May 2015. 2 Natalie buys two deluxe mixers on account from Kzinski Supply Co. for $1,150 ($575 each), FOB destination, terms n/30. 16 She sells one deluxe mixer for $1,100 cash. 25 She pays the amount owed to Kzinski. 2 She buys one deluxe mixer on account from Kzinski Supply Co. for $592, FOB destination, terms n/30. 30 Natalie sells two deluxe mixers for a total of $2,200 cash. 31 She pays the amount owed to Kzinski. She buys two deluxe mixers on account from Kzinski Supply Co. for $1,172 ($586 each), FOB destination, terms n/30. 13 She sells three deluxe mixers for a total of $3,300 cash. 30 Natalie pays the amount owed to Kzinski. May 4 She buys three deluxe mixers on account from Kzinski Supply Co. for $1,800 ($600 each), FOB destination, terms n/30. 27 She sells one deluxe mixer for $1,100 cash. (a) Prepare journal entries for each of the transactions. (b) 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 $570 each. (c) Calculate (i) ending inventory, (ii) cost of goods sold, (iii) gross profit, and (iv) gross profit rate under each of the following methods: LIFO, FIFO, and average cost. (Round average unit cost to three decimal places.) (d) Natalie is thinking of getting a bank loan. If this is the only factor Natalie has to consider in choosing an inventory cost flow assumption, which cost flow assumption would you recommend that Natalie use? Why?
1 (Note: This is a continuation of the Cookie Chronicle from Chapters 1 through 7.) 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 and asks the following questions. 1. Curtis has provided me with a set of his most recent financial statements. What calculations should I do with the data from these statements, and how will the results 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 permitting my customers to 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. June. 1 After much thought, Natalie sells a mixer to Curtis on credit, terms n/30, for $1,100 (cost of mixer $600). July. 15 Aug. 10 2 Natalie meets with the bank manager and arranges to get access to a credit card account. The terms of credit card transactions are 3% of the sales transactions and a monthly equipment rental charge of $75. 30 Natalie teaches 13 classes in June. Seven classes were paid for in cash, $1,050; the other six classes were paid for by credit card, $900. 30 Natalie receives and reconciles her bank statement. She makes sure that the bank has correctly processed the monthly $75 charge for the rental of the credit card equipment and the 3% fee on the credit card transactions. 30 Curtis calls Natalie. He is unable to pay the amount outstanding for another month, so he signs a one-month, 6% note receivable. Natalie sells a mixer to a friend of Curtis's. The friend pays $1,100 for the mixer by credit card (cost of mixer $600). 30 Natalie teaches 16 classes in July. Eight classes are paid for in cash, $1,200; eight classes are paid for by credit card, $1,200. 31 Natalie reconciles her bank statement and makes sure the bank has recorded the correct amounts for the rental of the credit card equipment and the credit card sales. 31 Curtis calls Natalie. He cannot pay today but hopes to have a check for her at the end of the week. Natalie prepares the appropriate journal entry. Curtis calls again and promises to pay at the end of August, including interest for 2 months. 31 Natalie receives a check from Curtis in payment of his balance plus interest outstanding. (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.
1 (Note: This is a continuation of the Cookie Chronicle from Chapters 1 through 8.) CCC9 Part 1 Now that she is selling mixers and her customers can use credit cards to pay for them, Natalie is thinking of upgrading her website to include the online sale of mixers and payment by credit card. This would enable her to sell these mixers to a wider range of customers using the Internet. Natalie contacts her brother who originally prepared the website for her. He agrees to upgrade the site so it can handle credit card security issues as well as direct order entry. The cost of the upgrade is $1,800. This cost would be incurred and paid for during the month of August 2015, and the upgrade would be operational September 1, 2015. Recall that Natalie s website had an original cost of $600 and is being amortized using the straight- line method over 24 months, starting December 1, 2014, with zero residual value. Additional costs for website maintenance and insurance are estimated to be $1,200 per year. If Natalie decides to upgrade the website, its useful life will not change and there will be no change in residual value. (a) Prepare the journal entry to record the upgrade. (b) Calculate the monthly amortization expense before the upgrade and the accumulated amortization and book value on August 31, 2015. (c) Calculate the revised monthly amortization expense as of September 1, 2015. (d) Calculate the accumulated amortization and book value on December 31, 2015. (e) Explain to Natalie the difference in accounting for the website upgrade costs and accounting for the costs incurred for website maintenance and insurance. In your explanation, comment on the generally accepted accounting principles that affect the accounting for these transactions. Part 2 Natalie is also thinking of buying a van that will be used only for business. The cost of the van is estimated at $38,500. 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 her about 5 years, and she expects to drive it for 100,000 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 $6,500. 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 balance sheet. She has come to you for advice on calculating the van s depreciation.
(a) Determine the cost of the van. (b) Prepare a depreciation table for straight-line depreciation (similar to the one in Illustration 9-9). Recall that Cookie Creations has a December 31 fiscal year-end. (c) What method should Natalie use for tax purposes? Provide a justification for your choice. Is she required to use the same approach for financial reporting and tax reporting?
1 (Note: This is a continuation of the Cookie Chronicle from Chapters 1 through 9.) 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 9% 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. (a) Calculate the interest payable that was accrued and recorded to January 31, 2015. Round to nearest dollar. (b) Calculate the total interest expense and interest payable from February 1 to August 31, 2015. Prepare the journal entry at August 31, 2015, to bring the accounting records up to date. Round to nearest dollar. (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.
1 (Note: This is a continuation of the Cookie Chronicle from Chapters 1 through 11.) CCC12 Natalie has prepared the balance sheet and income statement of Cookie & Coffee Creations Inc. and would like you to prepare the cash flow statement. The comparative balance sheet of Cookie & Coffee Creations Inc. at October 31, 2018 for the years 2018 and 2017 and the income statement for the year ended October 31, 2018, are presented below. Additional information: 1. Equipment (cost $4,500 and book value $3,000) was disposed of at the beginning of the year for $500 cash and replaced with new equipment purchased for $4,000 cash. 2. Additional equipment was bought for $14,000 on November 1, 2017. A $12,000 note payable was signed. The terms provide for equal semi-annual installment payments of $2,000 on May 1 and November 1 of each year, plus interest of 5% on the outstanding principal balance. 3. Other equipment was bought for $13,000 cash. 4. Dividends were declared on the preferred and common stock on October 15, 2018, to be paid on November 15, 2018. 5. Accounts payable relate only to merchandise creditors. 6. Prepaid expenses relate only to other operating expenses. (a) Prepare a statement of cash flows for Cookie & Coffee Creations Inc. for the year ended October 31, 2018, using the indirect method. *(b) Prepare a statement of cash flows for Cookie & Coffee Creations Inc. for the year ended October 31, 2018, using the direct method. COOKIE & COFFEE CREATIONS INC. Balance Sheet October 31, Assets 2018 2017 Cash $ 22,324 $5,550 Accounts receivable 3,250 2,710 Inventory 7,897 7,450 Prepaid expenses 5,800 6,050 Equipment 102,000 75,500 Accumulated depreciation equipment (25,200) (9,100) Total assets $116,071 $88,160
COOKIE & COFFEE CREATIONS INC. Balance Sheet October 31, Liabilities and Stockholders Equity 2018 2017 Accounts payable $ 1,150 $ 2,450 Income taxes payable 9,251 7,200 Dividends payable 27,000 27,000 Salaries and wages payable 7,250 1,280 Interest payable 188 0 Note payable 10,000 0 Preferred stock, no par, $6 cumulative, 3,000 and 2,800 shares issued, respectively 15,000 14,000 Common stock, $1 par 25,180 shares issued and outstanding 25,180 25,180 Additional paid-in capital treasury stock 250 250 Retained earnings 20,802 10,800 Total liabilities and stockholders equity $116,071 $88,160 COOKIE & COFFEE CREATIONS INC. Income Statement Year Ended October 31, 2018 Sales $485,625 Cost of goods sold 222,694 Gross profit 262,931 Operating expenses Salaries and wages expense $147,979 Depreciation expense 17,600 Other operating expenses 48,186 213,765
Income from operations 49,166 Other expenses Interest expense $ 413 Loss on disposal of plant assets 2,500 2,913 Income before income tax 46,253 Income tax expense 9,251 Net income $ 37,002
1 (Note: This is a continuation of the Cookie Chronicle from Chapters 1 through 12.) CCC13 The comparative balance sheet of Cookie & Coffee Creations Inc. at October 31, 2018 for the years 2018 and 2017, and the income statements for the years ended October 31, 2017 and 2018, are presented below. COOKIE & COFFEE CREATIONS INC. Balance Sheet October 31 Assets 2018 2017 Cash $ 22,324 $ 5,550 Accounts receivable 3,250 2,710 Inventory 7,897 7,450 Prepaid expenses 5,800 6,050 Equipment 102,000 75,500 Accumulated depreciation (25,200) (9,100) Total assets $116,071 $88,160 Liabilities and Stockholders Equity Accounts payable $ 1,150 $ 2,450 Income taxes payable 9,251 7,200 Dividends payable 27,000 27,000 Salaries and wages payable 7,250 1,280 Interest payable 188 0 Note payable current portion 4,000 0 Note payable long-term portion 6,000 0 Preferred stock, no par, $6 cumulative 3,000 and 2,800 shares issued, respectively 15,000 14,000 Common stock, $1 par 25,180 shares issued 25,180 25,180 Additional paid in capital treasury stock 250 250 Retained earnings 20,802 10,800 Total liabilities and stockholders equity $116,071 $88,160
Additional information: COOKIE & COFFEE CREATIONS INC. Income Statement Year Ended October 31 2018 2017 Sales $485,625 $462,500 Cost of goods sold 222,694 208,125 Gross profit 262,931 254,375 Operating expenses Salaries and wages expense 147,979 146,350 Depreciation expense 17,600 9,100 Other operating expenses 48,186 42,925 Total operating expenses 213,765 198,375 Income from operations 49,166 56,000 Other expenses Interest expense 413 0 Loss on disposal of plant assets 2,500 0 Total other expenses 2,913 0 Income before income tax 46,253 56,000 Income tax expense 9,251 14,000 Net income $ 37,002 $ 42,000 Natalie and Curtis are thinking about borrowing an additional $20,000 to buy more kitchen equipment. The loan would be repaid over a 4-year period. The terms of the loan provide for equal semi-annual payments of $2,500 on May 1 and November 1 of each year, plus interest of 5% on the outstanding balance. (a) Calculate the following ratios for 2017 and 2018. 1. Current ratio 2. Debt to total assets 3. Gross profit rate 4. Profit margin 5. Return on assets (Total assets at November 1, 2016, were $33,180.) 6. Return on common stockholders equity (Total common stockholders equity at November 1, 2016, was $23,180. Dividends on preferred stock were $16,800 in 2017 and $18,000 in 2018). (b) Prepare a horizontal analysis of the income statement for Cookie & Coffee Creations Inc. using 2017 as a base year. (c) Prepare a vertical analysis of the income statement for Cookie & Coffee Creations Inc. for 2018 and 2017.
(d) Comment on your findings from parts (a) to (c). (e) What impact would borrowing an additional $20,000 to buy more equipment have on each of the ratios in (a) above, assuming that no changes are expected on the income statement and balance sheet? Comment on your findings. (f) What would justify a decision by Cookie & Coffee Creations Inc. to buy the additional equipment? What alternatives are there instead of bank financing?