Continuing Cookie Chronicle Business

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 peoples
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 organizationproprietorship, 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.
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
months worth of depreciation, regardless of when the equipment was obtained by
the business.)
3. Natalies 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 Natalies 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 Natalies
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.

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 DepreciationEquipment
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
75
56
2,000
300
15
800
$ 40
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.
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. Ive 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. (Natalies 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 months 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 months worth of interest on her grandmothers loan needs to be
accrued. (The interest rate is 6%.)

4.
5.
6.
During the month, $110 of insurance has expired.

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.
An inventory count of mixers at the end of January reveals that Natalie has three
mixers remaining.
Instructions
Using the information from previous chapters and the new information above, do the
following.
(a) Answer Natalies 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.
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
13
She sells three deluxe mixers for a total of $3,450 cash.
30
Natalie pays the amounts owed to Kzinski.
May4
She buys three deluxe mixers on account from Kzinski Supply Co. for $1,875
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.

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 Natalies 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 LEDGERCOOKIE CREATIONS
Cash
Date
2015
June 1
1
3
3
8
9
13
20
28
28
Explanat
ion
Ref.
Debit
Credi
t
Balan
ce
625
2,657
3,407
2,782
95
2,687
56
2,631
425
3,681
3,256
297
3,411
3,114
Balance
750
Check
#600
Check
#601
Check
#302
1,050
Check
#603
155
Check
#604
110
3,224

PREMIER BANK
Statement of AccountCookie 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 Natalies utilities expense.
5. The NSF check was from Ron Black. Natalie received this check for teaching a class
to Rons 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?
11
CCC8 One of Natalies 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
Natalies 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 Natalies 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.

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 vans cost on her income statement and
statement of financial position. She has come to you for advice on calculating the vans
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 units-of-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 Natalies statement of
financial position at December 31, 2015? What impact will the three methods have on
Natalies income statement in 2015?
(d) What impact will the three methods of depreciation have on Natalies income
statement over the vans total 5-year useful life?
(e) What method of depreciation would you recommend Natalie use?
13
CCC10Natalie is thinking of repaying all amounts outstanding to her grandmother. Recall

that Cookie Creations borrowed $2,000 on November 16, 2014, from Natalies 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 months accrued interest.
(c) Natalie repays her grandmother on September 15, 201510 months after her
grandmother extended the loan to Cookie Creations. Prepare the journal entry for the
loan repayment.

CCC11Natalie and her friend Curtis Lesperance decide that they can benefit from joining
Cookie Creations and Curtiss 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.
CCC11Part 1 Curtis has operated his coffee shop for 2 years. He buys coffee, muffins, and
cookies from a local supplier. Natalies 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.
Curtiss 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. Curtiss dad and Natalies 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 were 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 Curtiss dad and the same number to Natalies grandmother, in
(d)
15
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.
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.

CCC11Part 2 After establishing their companys 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 companys 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
Issues an additional 800 preference shares to Natalies brother for $4,000.

Declares a semiannual dividend to the preference shareholders of record on
May 15, payable on June 1.
June30 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.
Oct.31 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).
31 Records income tax expense. (The company has a 20% income tax rate.)
31 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.
17
CCC12Natalie 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 Kens 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 Curtiss 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 Kens 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?

CCC13Natalie 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
$462,500
Cost of goods sold
231,250
Gross profit
231,250
Operating expenses
Salaries and wages expense$92,500
Depreciation expense
3,900
Other operating expenses 35,987
132,387
Income from operations
98,863
Interest expense
413
Income before income tax
98,450
Income tax expense
19,690
Net income
$ 78,760
Statement of Financial Position
October 31, 2016
Assets
Property, plant, and equipment
Furniture and fixtures
Accumulated depreciation
furniture and fixtures
Computer equipment
computer equipment
Kitchen equipment
kitchen equipment
Current assets
Prepaid expenses
Inventory
Accounts receivable
Cash
$12,500
(1,250)
4,200
11,250
(600)
29,000
3,600
(2,050)
26,950 $ 41,800
$ 6,300
17,897
3,250
79,919
107,366

Total assets
19
$149,166
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
39,930
Retained earnings
64,760
Less: Treasury sharesordinary (750 shares), at cost
500
Total equity
104,190
Non-current liabilities
Note payablelong-term portion
$ 6,000
Current liabilities
Note payablecurrent 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
38,976
Total liabilities
44,976
Total equity and liabilities
$149,166
3.
4.
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.

CCC14The 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.
Statement of Financial Position
October 31, 2016
Assets
Property, plant, and equipment
Furniture and fixtures
furniture and fixtures
Computer equipment
computer equipment
Kitchen equipment
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 $ 41,800
$ 6,300
17,897
3,250
79,919
107,366
$149,166
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
39,930
Retained earnings
64,760
Less: Treasury sharesordinary (750 shares), at cost
500
Total equity
104,190
Non-current liabilities
Note payablelong-term portion
$ 6,000
Current liabilities
Note payablecurrent 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
38,976
Total liabilities
44,976
Total equity and liabilities
$149,166
21

Income Statement
Year Ended October 31, 2016
Sales
$462,500
Cost of goods sold
231,250
Gross profit
231,250
Operating expenses
Salaries and wages expense$92,500
Depreciation expense
3,900
Other operating expenses 35,987
132,387
Income from operations
98,863
Interest expense
413
Income before income tax
98,450
Income tax expense
19,690
Net income
$ 78,760
Instructions
(a) 1. Calculate the current ratio
6.
2. Calculate the receivables turnover
3. Calculate the inventory turnover
4. Calculate the debt to total assets
5. Calculate the times interest earned
shareholders equity
Calculate the gross profit rate

7. Calculate the profit margin
8. Calculate the asset turnover
9. Calculate the return on assets
10. Calculate the return on ordinary
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?

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