Question

CC13 Natalie’s friend, Curtis Lesperance, decides to meet withNatalie after hearing that her discussions about a possiblebusiness partnership with her friend Katy Peterson have failed.(Natalie had decided that forming a partnership with Katy, a highschool friend, would hurt their friendship. Natalie had alsoconcluded that she and Katy were not compatible to operate abusiness venture together.) Because Natalie has been so successfulwith Cookie Creations and Curtis has been just as successful withhis coffee shop, they both conclude that they could benefit fromeach other’s business expertise. Curtis and Natalie next evaluatethe different types of business organization. Because of theadvantage of limited personal liability, they decide to form acorporation. Curtis has operated his coffee shop for 2 years. Hebuys coffee, muffins, and cookies from a local supplier. Natalie’sbusiness consists of giving cookie-making classes and selling fineEuropean mixers. The plan is for Natalie to use the premises Curtiscurrently rents to give her cooking-making classes anddemonstrations of the mixers that she sells. Natalie will alsohire, train, and supervise staff to bake the cookies and muffinssold 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 centrallocation for selling the mixers. The current market values of theassets of both businesses are as follows. Curtis’s Coffee CookieCreations Cash $7,130 $12,000 Accounts receivable 100 800 Inventory450 1,200 Equipment 2,500 1,000* *Cookie Creations decided not tobuy the delivery van considered in Chapter 10. Combining forceswill also allow Natalie and Curtis to pool their resources and buya few more assets to run their new business venture. Combiningforces will also allow Natalie and Curtis to pool their resourcesand buy a few more assets to run their new business venture. Curtisand Natalie then meet with a lawyer and form a corporation onNovember 1, 2017, called Cookie & Coffee Creations Inc. Thearticles of incorporation state that there will be two classes ofshares that the corporation is authorized to issue: common sharesand preferred shares. They authorize 100,000 no-par shares ofcommon stock, and 10,000 no-par shares of preferred stock with a$0.50 noncumulative dividend. The assets held by each of their soleproprietorships will be transferred into the corporation at currentmarket value. Curtis will receive 10,180 common shares, and Nataliewill receive 15,000 common shares in the corporation. Therefore,the shares have a fair value of $1 per share. Natalie and Curtisare very excited about this new business venture. They come to youwith the following questions: 1. “Curtis’s dad and Natalie’sgrandmother are interested in investing $5,000 each in the businessventure. We are thinking of issuing them preferred shares. Whatwould be the advantage of issuing them preferred shares instead ofcommon shares?” 2. “Our lawyer has sent us a bill for $750.When wediscussed the bill with her, she indicated that she would bewilling to receive common shares in our new corporation instead ofcash for her services. We would be happy to issue her shares, butwe’re a bit worried about accounting for this transaction. Can wedo this? If so, how do we determine how many shares to give her?”Instructions (a) Answer their questions. (b) Prepare the journalentries required on November 1, 2017, the date when Natalie andCurtis transfer the assets of their respective businesses intoCookie & Coffee Creations Inc. (c) Assume that Cookie &Coffee Creations Inc. issues 1,000 $0.50 noncumulative preferredshares to Curtis’s dad and the same number to Natalie’sgrandmother, in both cases for $5,000. Also assume that Cookie& Coffee Creations Inc. issues 750 common shares to its lawyer.Prepare the journal entries for each of these transactions. Theyall occurred on November 1. (d) Prepare the opening balance sheetfor Cookie & Coffee Creations Inc. as of November 1, 2017,including