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Cookie Creations (Chapters 9 and 10)
This assignment will focus on the Cookie Creations case study from Chapter 9 (page 9-37) and Chapter 10 (page 10-42) of your textbook. There are two parts to this assignment. Review the case situations for each part (i.e., in each chapter), and then complete the instructions.
One of Natalie’s friends, Curtis Lesperance, runs a coffee shop where he sells specialty coffees and prepares and sells muffins and cookies. He is eager to buy one of Natalie’s fine European mixers, which would enable him to make larger batches of muffins and cookies. However, Curtis cannot afford to pay for the mixer for at least 30 days. He asks Natalie if she would be willing to sell him the mixer on credit.Natalie comes to you for advice. She asks you to address the questions below.
Curtis has given me a set of his most recent financial statements. What calculations should I do with the data from these statements, and what questions should I ask him after I have analyzed the statements? How will this information help me decide if I should extend credit to Curtis?
Is there an alternative other than extending credit to Curtis for 30 days?
I am thinking seriously about being able to have my customers use credit cards. What are some of the advantages and disadvantages of letting my customers pay by credit card?
The following transactions occurred in June through August 2020.June 1: After much thought, Natalie sells a mixer to Curtis on credit, terms n/30, for $1,150 (cost of mixer $620).June 30: Curtis calls Natalie. He is unable to pay the amount outstanding for another month, so he signs a 1-month, 8.35% note receivable.July 31: Curtis calls Natalie. He indicates that he is unable to pay today but hopes to have a check for her at the end of the week. Natalie prepares the journal entry to record the dishonor of the note. She assumes she will be paid within a week.Aug. 7: Natalie receives a check from Curtis in payment of his balance owed.Instructions:
Answer Natalie’s questions in a Word document.
Prepare journal entries for the transactions that occurred in June, July, and August in an Excel spreadsheet. Round to the nearest dollar. Note that the company uses a perpetual inventory system. Use the Part I Excel Template to record your transactions.
To reiterate, you will write your responses to Natalie’s questions (1–3) in a Word document, and you will complete the journal transactions in an Excel spreadsheet. Your responses to Part I (Natalie’s questions) should be a minimum of one page in length, and you will add your responses for Part II to this document before submitting.
Natalie is also thinking of buying a van that will be used only for business. The cost of the van is estimated at $36,500. Natalie would spend an additional $2,500 to have the van painted. In addition, she wants the back seat of the van removed so that she will have a lot of room to transport her mixer inventory as well as her baking supplies. The cost of taking out the back seat and installing shelving units is estimated at $1,500. She expects the van to last 5 years, and she expects to drive it for 200,000 miles. The annual cost of vehicle insurance will be $2,400. Natalie estimates that at the end of the 5-year useful life, the van will sell for $7,500. Assume that she will buy the van on August 15, 2020, and it will be ready for use on September 1, 2020.Natalie is concerned about the impact of the van’s cost on her income statement and balance sheet. She has come to you for advice on calculating the van’s depreciation.Instructions:
Determine the cost of the van.
Prepare three depreciation tables for 2020, 2021, and 2022: one for straight-line depreciation (similar to the one in Illustration 10-9), one for double-declining balance depreciation (Illustration 10-13), and one for units-of-activity depreciation (Illustration 10-11). Use the Part II Excel Template to determine depreciation. For units-of-activity, Natalie estimates that she will drive the van as follows: 15,000 miles in 2020; 45,000 miles in 2021; and 50,000 miles in 2022. Recall that Cookie Creations has a December 31 year-end.
What impact will the three methods of depreciation have on Natalie’s balance sheet at December 31, 2020? What impact will the three methods have on Natalie’s income statement in 2020?
What impact will the three methods of depreciation have on Natalie’s income statement over the van’s total 5-year useful life?
What method of depreciation would you recommend Natalie use, and why?