Ballister Dorth created Ballister Systems on October 1, 2020. Dorth is organized as a sole proprietorship and will provide consulting services, computer system installations, and custom program development. Dorth has adopted the calendar year for reporting and prepared the company's first set of financial statements as of December 31, 2021. Over the three months since the 2021 yearend Ballister has been in conversation with Jessie Swanson. Jessie is interested in joining the firm and would like to become partners with Ballister. Ballister likes Jessie and sees this as an opportunity to expand but is worried about liability issues around taking on a partner. Jessie has $200,000 in cash and an office building with a fair value of $170,000 for the land and $450,000 for the building to contribute to the business. He is willing to transfer title of the office building to Ballister Systems if the company will take on the $260,000 mortgage. In return Jessie would like an $85,000 per year salary allowance, 10% on his original investment and to share the remaining income or loss 50:50 with Ballister. He has agreed that Ballister should receive $90,000 in salary and 10% on his original investment (beginning balance in capital) as well. Ballister has provided you with his financial statements as prepared by his brother. Use these financial statements as a basis for your analysis Required: 1. Regarding the formation of a partnership: a) Prepare a memo for Ballister identifying the pros and cons of accepting Jessie as a partner and calculate the amount of income Ballister can expect for the next year if the rest of the years Revenues and Expenses a) stay the same, b) double and c) decline by 60%. Calculate income for each possibility. b) Prepare the journal entry to accept Jessie into the company on April 1, 2021. 2. Jessie has brought up the idea of incorporating instead. a) It will cost the company $3,400 to incorporate but Jessie feels that it would better protect his life partner (Sam) if the business runs into problems. Prepare another memo itemizing the pros and cons of incorporating and calculate the amount of income Ballister can expect for the next year if the rest of the year s Revenues and Expenses a) stay the same, b) double and c) decline by 60%. Assume that all salary and interest allowances are honoured by the corporation (ie become salary expense and income expense). b) Prepare the journal entries to change the company into a corporation and to accept Jessie into the firm. Assume each partner receives the same number of shares 200,000 shares issued. 3. Suppose that Ballister decides to incorporate because he does not want anyone else to have a say in his business. He will hire Jessie for $70,000 per year and purchase Jessies building for $520,000. He will also need an additional $200,000 in cash for the expansion. Ballister has brought to you the following financing ideas he has and is asking for your advice. a) He thinks that he would like to issue bonds with a coupon of 3.5% paid yearly over 10 years to finance the purchase and expansion. The going market rate is 4%. b) He is also looking into issuing noncumulative preferred shares with a dividend of 5%. c) His bank has agreed to loan him what he needs at a rate of 6%. He will need to make monthly repayments of principle and interest over the next 10 years. Explain the pros and cons of each choice 3a), 3b) and 3c). Be sure to include in your discussion cash available for use at the beginning of the 10 years, cash paid out throughout the 10 years, cash paid out at the end of the 10 years as well as any effects on the income statement in the first year relating to his financing choices. Ballister Systems Income Statement For Three Months Ended March 31, 2021 Revenues: Computer Services Revenue $126,915 Net sales 53,190 Total revenues $180,105 Expenses: Cost of Goods Sold $20,900 Rent Expense 6,000 Wages Expense 6,900 Depreciation Expense 2,595 Computer Supplies Expense 580 Repairs Expense, Computer 230 Advertising Expense 1,400 Insurance Expense 3,700 Mileage Expense 505 Total expenses 42,810 Net income (loss) $137,295 Ballister Systems Statement of Changes in Equity For Three Months Ended March 31, 2021 Ballister Dorth, capital, December 31, 2020 $75,907 Add: Net income $137,295 Investment by owner 37,000 174,295 Total $250,202 Less: Withdrawals by owner 27,000 Ballister Dorth, capital, March 31, 2021 $223202 Ballister Systems Balance Sheet 31-Mar-18 Assets Current assets: Cash $219,228 Accounts receivable 40,025 Merchandise Inventory 7,650 Computer Supplies 65 Prepaid Insurance 7,560 Prepaid Rent 7,425 Total current assets $281,953 Property, plant and equipment: Office Equipment $22,800 Less: Accumulated Depreciation, Office Equipment 2,280 $20,520 Computer Equipment $11,640 Less: Accumulated Depreciation, Computer Equipment 2,910 8,730 Total property, plant and equipment 29,250 Total assets $311,203 Liabilities Current liabilities: Accounts Payable Wages Payable $84,401 3,600 Equity Ballister Dorth, Capital 223,202 Total liabilities and equity $311,203