Reference no: EM132460688

Natalie's friend, Curtis Lesperance, decides to meet with Natalie after hearing that her discussions about a possible business partnership with her friend Katy Peterson have failed. (Natalie had decided that forming a partnership with Katy, a high school friend, would hurt their friendship. Natalie had also concluded that she and Katy were not compatible to operate a business venture together.)

• Because Natalie has been so successful with Continuing Cookie Chronicle and Curtis has been just as successful with his coffee shop, they both conclude that they could benefit from each other's business expertise. Curtis and Natalie next evaluate the different types of business organization. Because of the advantage of limited personal liability, they decide to form a corporation.

• Curtis has operated his coffee shop for 2 years. He buys coffee, muffins, and cookies from a local supplier. Natalie's business consists of giving cookie-making classes and selling fine European mixers. The plan is for Natalie to use the premises 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                                         CoffeeContinuing                 Cookie Chronicle

Cash                                             $7,130                               $12,000

Accounts receivable                             100                                     800

Inventory                                           450                                    1200

Equipment                                         2,500                                   1,000

• Combining forces will also allow Natalie and Curtis to pool their resources and buy a few more assets to run their new business venture.

• Curtis and Natalie then meet with a lawyer and form a corporation on November 1, 2020, called Cookie & Coffee Creations Inc. The articles of incorporation state that there will be two classes of shares that the corporation is authorized to issue: common shares and preferred shares. They authorize 100,000 no-par shares of common stock, and 10,000 no-par shares of preferred stock with a $0.50 noncumulative dividend.

• The assets held by each of their sole proprietorships will be transferred into the corporation at current market value. Curtis will receive 10,180 common shares, and Natalie will receive 15,000 common shares in the corporation. Therefore, the shares have a fair value of $1 per share.

Natalie and Curtis are very excited about this new business venture. They come to you with the following questions:

Question 1: Prepare the journal entries required on November 1, 2020, the date when Natalie and Curtis transfer the assets of their respective businesses into Cookie & Coffee Creations Inc.

1. Date Account Titles and Explanation Debit Credit

Question 2: Assume that Cookie & Coffee Creations Inc. issues 1,000 $0.50 noncumulative preferred 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 common shares to its lawyer.

Question 3: Prepare the journal entries for each of these transactions. They all occurred on November 1.

1. Date Account Titles and Explanation Debit Credit
2. To record issue of preferred stock
3. To record issue of common shares to lawyer.

Question 4: Prepare the opening balance sheet for Cookie & Coffee Creations Inc. as of November 1, 2020, including the journal entries in (b) and (c) above.