Recall (from Chapter 12) that Natalie had been considering forming a partnership with Jade Wingert, one of her friends. Natalie has concluded that she and Jade are not compatible to operate a business together and Natalie has continued on her own.

Natalie’s parents, Janet and Brian Koebel, have been operating Santé Sweets Ltd., a private corporation, for a number of years. Santé Sweets Ltd. is a specialty bakery that features organic and gluten-free bakery products including their signature all-natural granola bars.

They are very proud of Natalie and the success of Santé Smoothies and have decided that it may be time to get Natalie involved with the operation of the family business.

In anticipation of Natalie graduating, and in hopes of spending a little more time away from the bakery, Janet and Brian have discussed with Natalie the possibility of her becoming one of the shareholders of Santé Sweets Ltd. In addition, once Natalie has graduated, she would assume the full-time position of administrator. Natalie would continue to provide smoothies and sell juicers; however, that would be done by Santé Sweets in future rather than by Natalie’s Santé Smoothies.

The share capital and the retained earnings of Santé Sweets Ltd.

at June 1, 2021, are as follows:

$6 cumulative preferred shares, 10,000
shares authorized, none issued
Common shares, unlimited number
of shares authorized, 200 shares issued .............. $ 200
Retained earnings ............................................... 116,251

Profit before income tax for the year ended May 31, 2022, was $255,823. The company has an 18% income tax rate. A cash dividend of $85,000 was declared on May 16, 2022, to common shareholders of record on May 20, 2022, and was paid on May 31, 2022.

Based on the bakery’s success, the Koebels would like to issue 10 shares to Natalie for $1,200 per share. Natalie would contribute the fair value of Santé Smoothies’ assets in exchange for the shares of Santé Sweets as follows:

                                      Santé Smoothies
Cash ............................................... $8,050
Accounts receivable .......................... 800
Merchandise inventory ................. 1,200
Supplies ............................................. 450
Equipment ...................................... 1,500

The sale of shares by Santé Sweets to Natalie is expected to take place on June 1, 2022. Currently, Janet and Brian each own 100 shares. Assume Santé Sweets reports using ASPE.

Instructions

a. Prepare the journal entries required for the cash dividend declared on May 16 and paid on May 31, 2022. Who received the cash dividend, and for what amount?

b. Prepare the statement of retained earnings for Santé Sweets for the year ended May 31, 2022.

c. Prepare the shareholders’ equity section of the balance sheet for Santé Sweets at May 31, 2022.

d. Assume that Natalie purchases the shares of Santé Sweets Ltd. on June 1, 2022, in exchange for the fair value of assets held by Santé Smoothies. Prepare the journal entry required by Santé Sweets Ltd.

e. Determine the number of shares issued and the average per share amount for the common shares before and after Natalie purchases the shares of Santé Sweets. Why is there a significant change in value?

f. How do you think a value of $1,200 per share was determined when Janet and Brian were attempting to come up with the number of shares to be sold to Natalie? Do you think that the number of shares Natalie received in exchange for the assets of Santé Smoothies is fair? Why or why not?