Solution manual accounting principles 9e by kieso kimmel continuing cookies

Koebel, Drawings Revenue: Teaching Revenue Expenses: Advertising Expense, Supplies Expense, Travel Expense, Telephone Expense, Insurance Expense to prepare financial statements for her b

CCC1 CONTINUING COOKIE CHRONICLE

partnership is not an option since she is the sole owner of the business.

A proprietorship is the easiest to create and operate because there are no formal procedures involved in creating the proprietorship However, if she operates the business as a proprietorship she will personally have unlimited liability for the debts of the business Operating the business as a corporation would limit her liability to her investment in the business Natalie will in all likelihood require the services of a lawyer to incorporate Costs to incorporate as well as additional ongoing costs to administrate and operate the business as a corporation may be costly.

My recommendation is that Natalie choose the proprietorship form of business organization This is a very small business where the cost of incorporating outweighs the benefits of incorporating at this point in time Furthermore, it will be easier to stop operating the business if Natalie decides not to continue with it once she has finished college.

(b) Yes, Natalie will need accounting information to help her operate her business She will need information on her cash balance on a daily or weekly basis to help her determine if she can pay her bills She will need to know the cost of her services so she can establish her prices She will need to know revenue and expenses so she can report her net income for personal income tax purposes, on an annual basis If she borrows money, she will need financial statements so lenders can assess the liquidity, solvency, and profitability of the business Natalie would also find financial statements useful to better understand her business and identify any financial issues as early as possible Monthly financial statements would be best because they are more timely, but they are also more work to prepare.

Insurance

Liabilities: Accounts Payable, Unearned Revenue, Notes Payable

Owner’s Equity: N Koebel, Capital, N Koebel, Drawings

Revenue: Teaching Revenue

Expenses: Advertising Expense, Supplies Expense, Travel Expense, Telephone Expense, Insurance Expense

to prepare financial statements for her business The business is a separate entity from Natalie and must be accounted for separately.

CCC2 CONTINUING COOKIE CHRONICLE

Savings Bonds—this is a personal transaction.

8 Cash 500

N Koebel, Capital 500

11 Advertising Supplies 165

Cash 165

13 Baking Supplies 125

Cash 125

14 Baking Equipment 300

N Koebel, Capital 300

16 Cash 2,000 Notes Payable 2,000 17 Baking Equipment 900

Cash 900

20 Cash 125

Teaching Revenue 125

25 Cash 30

Unearned Revenue 30

COOKIE CREATIONS Trial Balance November 30, 2009

CCC3 CONTINUING COOKIE CHRONICLE

(a)

Nov 30 Advertising Supplies Expense 105

Advertising Supplies 105

($165 – $60) 30 Baking Supplies Expense 35

Baking Supplies 35

30 Depreciation Expense 20

Accumulated Depreciation—Baking Equipment 20

[($300 + $900) ÷ 60 months] 30 Interest Expense 5

Interest Payable 5

($2,000 X 06 X 1/12 X 5) 30 Accounts Receivable 300

Teaching Revenue 300

30 Telephone Expense 45

Accounts Payable 45

Accumulated Depreciation—Baking Equipment

CCC3 (Continued)

(a) (Continued)

Advertising Supplies Expense

Baking Supplies Expense

COOKIE CREATIONS Adjusted Trial Balance November 30, 2009

Account Debit Credit Cash $ 145

Accounts Receivable 300

Advertising Supplies 60

Baking Supplies 90

Prepaid Insurance 1,320 Baking Equipment 1,200 Accumulated Depreciation—Baking Equipment $ 20

Accounts Payable 45

Interest Payable 5

Unearned Revenue 30

Notes Payable 2,000 N Koebel, Capital 800

Teaching Revenue 425

Telephone Expense 45

Advertising Supplies Expense 105

Baking Supplies Expense 35

Depreciation Expense 20

Interest Expense 5

Totals $3,325 $3,325

CCC3 (Continued)

(c)

COOKIE CREATIONS Income Statement Month Ended November 30, 2009

Revenues Teaching revenue $425

Expenses Advertising supplies expense $105

Telephone expense 45

Baking supplies expense 35

Depreciation expense 20

Interest expense 5 210 Net income $215

Yes, Cookie Creations has been profitable in November It has a profit of $215 which is almost equal to one half of the revenue earned in November [Note: Statement of Owner’s Equity is not required—shown for information purposes only.] COOKIE CREATIONS Statement of Owner’s Equity Month Ended November 30, 2009

N Koebel, Capital, November 1, 2009 $ 0

Add: Investment 800

Net income 215

(c) (Continued)

[Note: Balance Sheet is not required—shown for information purposes only.]

COOKIE CREATIONS Balance Sheet November 30, 2009

Assets Cash $ 145

Accounts receivable 300

Advertising supplies 60

Baking supplies 90

Prepaid insurance 1,320 Baking equipment $1,200 Less: Accumulated depreciation 20 1,180 Total assets $3,095 Liabilities and Owner’s Equity Liabilities Notes payable $2,000 Accounts payable 45

Interest payable 5

Unearned revenue 30 Total liabilities 2,075 Owner’s equity

N Koebel, Capital 1,015

CCC4 CONTINUING COOKIE CHRONICLE

(a)

COOKIE CREATIONS Income Statement Two Months Ended December 31, 2009

Revenues Teaching revenue $4,515 Expenses Baking supplies expense $1,025 Salaries expense 1,006 Advertising supplies expense 165

Telephone expense 125

Insurance expense 110

Depreciation expense 40

Interest expense 15

Total expenses 2,486 Net income $2,029 COOKIE CREATIONS Statement of Owner’s Equity Two Months Ended December 31, 2009

N Koebel, Capital, November 1 $ 800

Add: Net income 2,029 2,829 Less: Drawings 500

(a) (Continued)

COOKIE CREATIONS Balance Sheet December 31, 2009

Assets Current assets

Cash $1,180

Property, plant, and equipment

COOKIE CREATIONS Post-Closing Trial Balance December 31, 2009

Account Debit Credit Cash $1,180 Accounts Receivable 875

Baking Supplies 350

Prepaid Insurance 1,210 Baking Equipment 1,200 Accumulated Depreciation, Baking Equipment $ 40

Accounts Payable 75

Salaries Payable 56

Unearned Revenue 300

Interest Payable 15

N Koebel, Capital 2,329

$4,815 $4,815

CCC5 CONTINUING COOKIE CHRONICLE

(a) Responses to Natalie’s questions

1 The mixers should be classified as inventory as they are for resale.

2 A perpetual inventory system will provide better control over inventory Because you are dealing with high-value items you should use the perpetual system.

3 You still need to count inventory to ensure that your records are accurate and that the inventory that is supposed to be on hand is actually there I suggest you should count the inventory once a month.

6 Merchandise Inventory 100

Cash 100

7 Accounts Payable [($2,875 ÷ 5) + $20] 595

Merchandise Inventory 595

8 Cash 375

Accounts Receivable 375

Sales 3,450

Accumulated depreciation—Baking Equipment

Cost of Goods Sold

Insurance Expense

Cookie Creations Trial Balance January 31, 2010

CCC5 (Continued)

Cookie Creations Adjusted Trial Balance January 31, 2010

CCC5 (Continued)

(f)

COOKIE CREATIONS Income Statement Month ended January 31, 2010 Sales $5,750 Cost of goods sold 2,975 Gross profit 2,775 Operating expenses

Other expenses

Interest expense 10 Net income $2,330

COST OF GOODS AVAILABLE FOR SALE

Total Cost

Cost of goods

Total Cost

Cost of goods

Less: Ending inventory $2,437.09

Total Cost

Part 1

The weaknesses in internal accounting controls in the system

recommended by John are:

the bank.

because of a lack of segregation of duties between the handling of cash, bank reconciling process, and recording of transactions in the accounting records.

it is all stored on John’s laptop.

company vulnerable to theft.

Improvements should include the following:

be locked in a safe until such as time as it can be deposited.

(or some other independent person) should sign all checks and make all deposits Checks should be signed only when there is documentation present to support the payment All invoices should be stamped “PAID”

to avoid duplicate payment.

the handling and recording of cash However, this may not be possible

in a small organization such as Cookie Creations At a minimum, Natalie and not John should prepare bank reconciliations monthly.

CCC8 (Continued)

Part 1 (Continued)

back-ups should be prepared It would be best if John used a computer at Cookie Creations to prepare the accounting information; however, if he is going to use his laptop, Natalie should ensure that she is provided with a regular back-up of all the accounting records This ensures that if John should ever lose his laptop or decide to no longer perform Cookie Creation’s accounting, Natalie would still have access to the company’s accounting records.

Natalie for her approval Natalie should then write and sign the check Part 2

(a)

COOKIE CREATIONS Bank Reconciliation June 30, 2010

Add: Deposit in transit $110

3,496

Less: Service charge $ 13

Telus 85

= $2,961 adjusted cash balance

CCC9 CONTINUING COOKIE CHRONICLE

1 Calculations you should perform on the statements are:

Given the type of business it is unlikely that Curtis would have a significant amount of accounts receivable.

Positive working capital and a high current ratio are indications that the company has good liquidity and will be more likely to be able to pay for the mixer The inventory turnover and days sales in inventory will provide additional information – the days sales in inventory will tell you how long, on average, it takes for inventory

to be sold.

2 Other alternatives to extending credit to Curtis include:

(a) (Continued)

3 The advantage of extending credit to customers is the anticipated increase in sales expected from customers who will purchase goods only if they can receive credit The disadvantages of extending credit are the additional costs incurred to keep track of amounts owed, the additional costs incurred when staff need to be assigned

to follow up on late account balances, and the risk of not collecting

a receivable from a customer who is unable to pay.

The advantages of allowing customers to use credit cards include making the purchase easier for the customer, potentially increasing sales, as customers are not limited to the amount of cash in their wallet, and reducing the accounts receivable you have to manage if credit cards are used instead of granting credit to customers In addition, the credit card company assumes the risk of nonpayment, and if a bank credit card is used the seller has check immediately.

The disadvantage is the cost to your business When a customer makes a purchase using a credit card you will have to pay a percentage of the sale to the credit card company The rate varies but 3% would not be unusual You will also have to pay to rent the equipment to process the credit card sales The fee is not large but

(a) Purchase price $36,500 Painting 2,500 Shelving 1,500 Cost of van $40,500

$40,500

Units-of activity depreciation

$40,500

The straight-line method of depreciation will result in the greatest amount of net income reported, the greatest amount of owner’s equity reported, and the greatest net book value of the asset reported.

(resulting in a net book value equal to the salvage value of $7,500) under each of the methods The impact will affect only the timing of the depreciation expense recognized each year.

assessment of usage of the van in relation to the amount of revenue earned As long as Natalie is willing to track the number of miles driven over the course of the year, then this would be the method recommended.

(a) Estimated liability, 2010

30 mixers sold X 10% = 3 mixers X $60 = $180

Note that there is no longer any liability outstanding for the mixers sold in 2010 The one-year warranty period has expired.

(a) 1 A formalized partnership agreement is imperative A formal agreement

will ensure that you consider all possible situations, contingencies, and disagreements that could arise At present, you may be in agree- ment with all the decisions being made However, if a disagreement occurs later on, you will be able to turn to the partnership agreement for guidance.

The partnership agreement should contain basic information such as the name and location of the partnership, the purpose of the business, and the date of inception In addition, the agreement should specify the names and capital contributions of the partners, the rights and duties of the partners, the basis for sharing net income or loss, provi- sions for withdrawal of assets, procedures for settling disputes, proce- dures for the withdrawal or admission of a partner, the rights and duties of a surviving partner if a partner dies, and procedures for liquidating a partnership.

2 Katy Peterson would need to borrow $10,300.

Total fair value of Cookie Creations’ net assets:

Total fair value of K Peterson’s (The Baker’s

Nook) net assets:

Difference $10,300

CCC12 (Continued)

(a) (Continued)

3 Both the total amount of assets and the total amount of Katy Peterson’s debt should be considered in making this decision Each partner is jointly and severally liable for all partnership liabilities If you go forward with the partnership, both partners will be signing the lease agreement This debt will be in addition to the bank loan payable, which is due in the near future If the business does not succeed and there are insufficient assets to pay all debt outstanding, creditors could then make claims against the personal assets of the partners Katy Peterson appears to have few personal assets This could leave you (Natalie Koebel) responsible for repaying all liabilities of the partnership.

4 Before becoming a partner with Katy Peterson, you (Natalie Koebel) should ask to see the financial statements of The Baker’s Nook to assess its profitability You should also consider what benefits (if any) would result from combining the businesses Lastly, it would be helpful to develop a cash flow budget, to see if the new business will generate enough cash to cover the lease payment and the upcoming bank loan repayment.

COOKIE CREATIONS AND MORE

Balance Sheet November 1, 2010

Assets Current assets

Cash $23,800* Accounts receivable $ 6,800

Inventory 1,650

Property, plant, and equipment

Equipment 8,500 Total assets $40,000

Liabilities and Partners’ Equity

CCC13 CONTINUING COOKIE CHRONICLE

the preferred stockholder does not have voting rights In this case, Curtis’s dad and Natalie’s grandmother can participate in the future success of Cookie & Coffee Creations Inc (by receiving annual dividends) without attempting to influence any decisions that would require shareholder approval.

Both will receive an annual dividend as long as the dividend is declared Any additional dividends declared and paid will be paid to the common shareholders This could prove to be another advantage

to both Natalie and Curtis if the company is successful and has excess cash to pay out dividends.

2 It is possible to pay for the $750 legal bill by issuing common shares However, the cost principle still applies Cost must equal the cash equivalent price, which is generally the fair market value

of the consideration given up If this amount cannot be determined,

we then look to the fair market value of the consideration received to determine the cash equivalent price In this case, Curtis and Natalie are receiving shares with a value of $1 per share This $1 per share

is the estimated fair value of the shares being given up in return for the legal fee expense As a result, 750 shares should be given up, valued at $750, which is the value of the legal fees.