You have two friends (Jacques and Gilles) who recently graduated from culinary school in France. You decided to invest in two cupcake shops and each friend will run one of the shops. Each will have full discretion over establishing and managing the businesses. On January 1, 2017, you gave Jacques €50,000 and Gilles €75,000 to start the businesses at the beginning of 2017 in exchange for 5,000 shares and 10,000 shares of common stock, respectively. Jacques and Gilles have each agreed to receive a starting salary of €40,000 per year.

Jacques decided to focus on selling cupcakes directly to customers, so he opened a bakery and retail store in the 5th Arrondissement of Paris. On January 1, 2017, he purchased equipment for €21,000 and furniture for €11,000. At that time, he also purchased a store for €600,000. He paid €30,000 in cash and borrowed the remaining €570,000 from a bank. The bank loan has an interest rate of 6% a year. Jacques pays interest on the 10th of the month for the previous month's interest but will pay no principal on January 1, 2027, when the loan is due in full. Although the loan is for 10 years, Jacques expects to use the building for at least 30 years.

Gilles decided to focus on selling cupcakes to restaurants and corporations, so he rented baking and office space in the 20th Arrondissement of Paris on January 1, 2017. He purchased equipment for €24,000 and a delivery truck for €30,000.

Now, in early January 2018, you have flown to Paris from your home in the United States to meet with Jacques and Gilles and discuss the results of your investments.

Jacques said " Business has been good. Customers come in and pay cash1 when they purchase the cupcakes. This year I collected €410,000 in cash from my customers. Throughout the year, I've purchased and received €280,000 in baking and other supplies for the shop from various vendors. I pay cash when I purchase these items. I try to buy just what I need, so I only have about €100 of unused supplies in the shop at any point in time. The shop is working out great and the customers love it. However, there has been more wear and tear on the furniture than I expected, so I'll be replacing most of the furniture in the next few weeks and that will cost me €17,000. However, the equipment I purchased is probably good for another three years.”

Jacques continued “The bank loan isn't due until 2027 and I've been keeping current with the monthly interest payments of $2,850. I'll be paying December’s interest in the next few days. Also, I recently wrote you a dividend check for €5,000. As we agreed, I received a salary of €40,000 for the year. Currently, I have €41,650 in the bank."

Gilles spoke next. "I've focused on selling to restaurants and corporations on credit, so they pay me later. I typically collect money within 30 days of making the sale. This year I sold €610,000 of merchandise; however, as of year-end, I’ve only collected €550,000 of this amount and my customers still owe me the remainder. With the state of the current economy, I'm worried about whether I'll be able to collect anywhere from €5,000 to €15,000 of what my customers still owe me. Throughout the year, I've also purchased baking and other supplies for the shop from various vendors. To receive quantity discounts and purchase the supplies for a slightly lower price, I purchase more at a time. This year I purchased and received €505,000 of supplies. My vendors let me buy on credit and then pay them later. Thus, I still owe my vendors €25,000. Currently, I have about €10,000 of supplies that I haven’t used that are at the bakery." Gilles continued, "Business has been strong and I've been selling to a variety of places. I've put more miles on the delivery truck than I expected so it will only last another three years. I will probably need to replace the equipment after another two years. I've found a great location for my baking and office space which I rent for only €1,400 a month. However, to get that low rent, I had to sign a three-year lease and pay three months of rent at a time. At the end of December, I paid the landlord for rent through March 2018. Since the location is great and the rental rate is good, I didn't mind signing the three-year lease and having to pay rent in advance. I’ve also paid myself the €40,000 salary as we agreed. Currently, I have €30,000 in the bank."

You told your friends that it seemed both businesses were doing well, and you were happy with your investments. After they left, you begin to think about the cash you originally gave each of them and how each performed. “Yes,” you think, “they both did well. Gilles received more cash from customers, but Jacques has more cash in the bank. So, who did better”?

Questions (Please Answer these):

1. Based on the narrative above, prepare the journal entries necessary to record the transactions described for both Jacques and Gilles.

2. Prepare an income statement, statement of retained earnings, balance sheet, and statement of cash flows for the first year of operations for both Jacques and Gilles.

3. Calculate any ratios or other analysis you believe will help you better understand the performance of both Jacques and Gilles.

4. In your opinion, who did better and why?

Answer rating: 100% (QA)

1 Journal 2017 01 Jan Jacques 50000 Gilles 75000 Capital 125000 Salary Account Jacques 40000 Salary Account Gilles 40000 Cash Account 80000 Journal 2017 01 Jan Common Stock 5000 10 50000 Common Stock ... View the full answer