Greg has operated his shop for 2 years. He buys coffee from a local supplier and bakes
Question:
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. However, you want to have a better understanding of his growth, so you ask to see is balance sheets for the past two years.
His comparative balance sheets are as follows:
Greg's Cinnamon Rolls | ||||
Condensed Balance Sheet | ||||
31-Oct | ||||
2021 | 2020 | |||
Assets | ||||
Current Assets | $8,050 | $7,502 | ||
Property, plant, and equipment (net) | 2,500 | 2,256 | ||
Other assets | 1,480 | 1,731 | ||
Total assets | $12,030 | $11,479 | ||
Liabilities and Stockholders' Equity | ||||
Current Liabilities | $3,230 | $3,330 | ||
Long-term liabilities | 1,270 | 1,300 | ||
Stockholders’ equity | 8,580 | 7,850 | ||
Total liabilities and stockholders' equity | $13,080 | $12,480 |
Required part A
Prepare a horizontal analysis of the balance sheet data for Greg's' Cinnamon Rolls, using 2020 as a base. (If amount and percentage are a decrease show the numbers as negative, e.g. -55,000, -20% or (55,000), (20%). Round percentages to 1 decimal place, e.g. 12.1%.)
Prepare a vertical analysis of the balance sheet data for Greg's' Cinnamon Rolls for 2021
Part B
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*
Other Assets 1,480 840
*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, 2021, 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 noncumulative dividend.
The assets held by each of your businesses will be transferred into the corporation at current market value. Greg will receive 12,030 common shares, and you will receive 15,470 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 B
Answer the questions.
Prepare the journal entries required on November 1, 2021, 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, 2021, including the journal entries in (B) and (C) above.
Finite Mathematics and Its Applications
ISBN: 978-0134768632
12th edition
Authors: Larry J. Goldstein, David I. Schneider, Martha J. Siegel, Steven Hair