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 $40
AccountsPayable 75
SalariesPayable 56
InterestPayable 15
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?

GENERALLEDGERCOOKIECREATIONS
Cash
Date Explanation Ref. Debit CreditBalance
2011
June1 Balance 2,657
1 750 3,407
3Check#600 625 2,782
3Check#601 95 2,687
8Check#602 56 2,631
9 1,050 3,681
13Check#603 425 3,256
20 155 3,411
28Check#604 297 3,114
28 110 3,224

PREMIERBANK
StatementofAccountCookieCreations
June30,2011
ChecksandDate Explanation OtherDebits Deposits
Balance
May31 Balance 3,256
June1 Deposit 750 4,066
6Check#600 625 3,381
6Check#601 95 3,286
8Check#602 56 3,230
9Deposit 1,050 4,280
10NSFcheck 100
10NSFfee 35 4,145
14Check#603 452 3,693
20Deposit 1253,818
23EFTTelus 85 3,733
28Check#599 361 3,372
30 BANKCHARGES13 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 35,987 138,337
Incomefromoperations 92,913
Otherexpenses
Interestexpense 413
Incomebeforeincometax 92,500
Incometaxexpense 18,500
NETINCOME $74,000

COOKIE&COFFEECREATIONSINC.
BalanceSheetOctober31,2012
Assets
Currentassets
Cash $32,219
Accountsreceivable 3,250
Inventory 17,897
Prepaidexpenses 6,300 $59,666
Property,plant,andequipment
Furnitureandfixtures $12,500
Accumulateddepreciationfurnitureandfixtures (1,250) 11,250
Computerequipment 4,200
Accumulateddepreciationcomputerequipment(600) 3,600
Kitchenequipment 83,000
Accumulateddepreciationkitchenequipment(8,300) 75,000 89,850
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
Stockholdersequity
Paidincapital
Preferredstock,2,800sharesissuedandoutstanding $14,000
Commonstock,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

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 $32,219
Accountsreceivable 3,250
Merchandiseinventory 17,897
Prepaidexpenses 6,300 $59,666
Property,plant,andequipment
Furnitureandfixtures$12,500
Accumulateddepreciationfurnitureandfixtures 1,250 11,250
Computerequipment4,200
Accumulateddepreciationcomputerequipment 600 3,600
Kitchenequipment83,000
Accumulateddepreciationkitchenequipment 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 $462,500
Costofgoodssold 231,250
Grossprofit 231,250
Operatingexpenses
Salariesandwagesexpense $92,500
Depreciationexpense9,850
Otheroperatingexpenses 35,987138,337
Incomefromoperations 92,913
Otherexpenses
Interestexpense 413
Incomebeforeincometax 92,500
Incometaxexpense 18,500
Netincome $74,000