HW Unit 2 Week 7

Due Aug 1, 2022 by 11:59pm
Points 48
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Available Jul 8, 2022 at 11am - Aug 1, 2022 at 11:59pm

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Corporate Accounting – 2 Parts

You and your friend Greg Kommens decide that you can benefit from joining your bakery with his cinnamon roll shop. In the first part of this problem, you will answer questions about setting up a corporation for your new business. In the second part of the problem, you will need to prepare financial information following the first year of operations of your new business.

Part A. Greg has operated his shop for 2 years. He buys coffee from a local supplier and bakes the cinnamon rolls in-house. Your business consists of catering events and selling fine mixers. The plan is for you to use the premises Greg currently rents to give you an opportunity to display your cakes and demonstrate the mixers that you sell. You will also hire, train, and supervise staff to bake cookies and muffins sold in the shop. By offering a greater variety of baked goods, both of you would benefit. 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.

Greg’s Cinnamon Rolls Your Business

Cash $7,500 $11,630

Accounts receivable 100 800

Inventory 450 1,200

Equipment 2,500 1,000*

*you decided not to buy the delivery van considered in level 8.

Combining forces will also allow you and Greg to pool your resources and buy a few more assets to run your new business venture.

Greg and you then meet with a lawyer and form a corporation on November 1, 2022, called Sunrise Bakery 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 non-cumulative dividend.

The assets held by each of your businesses will be transferred into the corporation at current market value. Greg will receive 10,550 common shares, and you will receive 14,630 common shares in the corporation.

Therefore, the shares have a fair value of $1 per share.

You and Greg are very excited about this new business venture. However, you have the following questions:

“Greg’s dad and your parents are interested in investing $5,000 each in the business venture. You are thinking of issuing them preferred shares. What would be the advantage of issuing them preferred shares instead of common shares?”
“Your lawyer has sent you a bill for $750.When you discussed the bill with her, she indicated that she would be willing to receive common shares in our new corporation instead of cash for her services. You would be happy to issue her shares, but you’re a bit worried about accounting for this transaction. Can you do this? If so, how do you determine how many shares to give her?”

Required part A

Answer the questions.
Prepare the journal entries required on November 1, 2022, the date when You and Greg transfer the assets of your respective businesses into Sunrise Bakery Inc.
Assume that Sunrise Bakery Inc. Issues 1,000 $0.50 non-cumulative preferred shares to Greg’s dad and the same number to Your parents, in both cases for $5,000. Also, assume that Sunrise Bakery Inc. issues 750 common shares to its lawyer. Prepare the journal entries for each of these transactions. They all occurred on November 1.
Prepare the opening balance sheet for Sunrise Bakery Inc. as of November 1, 2022, including the journal entries in (B) and (C) above.

Part B. After establishing your company’s fiscal year-end to be October 31, you and Greg begin operating Sunrise Bakery Inc. on November 1, 2022. On that date, after the issuance of shares, the paid-in capital section of the company’s balance sheet is as follows.

Paid-in capital

Preferred stock, $0.50 noncumulative, no par value,

10,000 shares authorized; 2,000 shares issued $10,000

Common stock, no par value, 100,000 shares

Authorized; 25,930 shares issued 25,930

Sunrise Bakery Inc. has the following selected transactions during its first year of operations.

Dec. 1 Issues an additional 800 preferred shares to your sibling for $4,000.

Apr. 30 Declares a semiannual dividend to the preferred stockholders of record on May 15, payable on June 1.

June 30 Repurchases 750 shares of common stock 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 preferred stockholders of record on November 15, payable on December 1.

Required part B