Because Natalie has been so successful operating Sant? Smoothie, another friend, Jade Wingert, has asked Natalie to become a partner in a new smoothie company. Jade believes that together they will create a thriving smoothie-making business. Jade has been operating a frozen yogourt shop called Gem Frogurt for about a year. Natalie is quite happy with her current business set-up. Up until now, she had not considered joining forces with anyone. However, Natalie has gathered the following information about Jade?s business and compared it with her own results. The current fair values of the assets and liabilities of both businesses are as follows:

All assets would be transferred into the partnership. The partnership would assume all of the liabilities of the two proprietorships.

Gem Frogurt?s bank loan is due on October 31, 2022.Jade operates her business from leased premises. She has just signed a lease for 12 months. Monthly rent will be $1,000; Jade?s landlord has agreed to draw up a new lease agreement that would be signed by both partners.

Jade has no assets and has a lot of student loans and credit card debt. Natalie?s assets consist of investments in Canada Savings Bonds.

Natalie has no personal liabilities.

Jade is reluctant to have a partnership agreement drawn up. She thinks it?s a waste of both time and money. As Jade and Natalie have been friends for a long time, Jade is confident that all problems can be easily resolved over a nice meal.

Natalie believes that it may be a good idea to establish a partnership with Jade. She comes to you with the following questions:

1. Do I really need a formalized partnership agreement drawn up? What would be the point of having one if Jade and I agree on all major decisions? What type of information should the partnership agreement contain?

2. I would like to have Jade contribute the same amount of capital as I am contributing. How much additional cash, beyond the amount in Jade?s proprietorship, would Jade have to borrow to invest in the partnership so that she and I have the same capital balances?

3. Jade has a lot of personal debt. Should this affect my decision about whether or not to go forward with this partnership? Why or why not?

4. What other issues should I consider before I say yes or no to Jade?

Instructions

a. Answer Natalie?s questions.

b. Assume that Natalie and Jade go ahead and form a partnership called Sant? Smoothies and More on April 1, 2022, and that Jade is able to borrow the additional cash she needs to contribute to the partnership. Prepare a balance sheet for the partnership at April 1.

Transcribed Image Text:

Santé Smoothie Gem Frogurt Cash Accounts receivable Merchandise inventory Supplies Equipment Bank loan payable $ 1,500 5,250 500 350 7,500 10,000 $8,050 800 1,200 450 1,500