Question 2 please

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 (see pages 2 and 3). 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 year's 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 Jessie's 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 $126,915 53, 190 $180,105 Revenues: Computer Services Revenue Net sales Total revenues Expenses: Cost of Goods Sold Rent Expense Wages Expense Depreciation Expense Computer Supplies Expense Repairs Expense, Computer Advertising Expense Insurance Expense Mileage Expense Total expenses Net income (loss) $20.900 6,000 6,900 2,595 580 230 1.400 3,700 505 42,810 $137,295 Ballister Systems Statement of Changes in Equity For Three Months Ended March 31, 2021 $75,907 $137 295 37 000 Ballister Dorth, capital, December 31, 2020 Add: Net income Investment by owner Total Less: Withdrawals by owner Ballister Dorth, capital, March 31, 2021 174,295 $250,202 27,000 $223,202 Page 2 of 3 $219.228 40,025 7,650 Ballister Systems Balance Sheet 31-Mar-18 Assets Current assets: Cash Accounts receivable Merchandise Inventory Computer Supplies Prepaid Insurance Prepaid Rent Total current assets Property, plant and equipment: Office Equipment Less: Accumulated Depreciation, Office Equipment Computer Equipment Less: Accumulated Depreciation, Computer Equipment Total property, plant and equipment Total assets 7,560 7.425 $281,953 $20,520 $22,800 2.280 $11,640 2,910 8.730 29.250 $311 203 Liabilities Current liabilities: Accounts Payable Wages Payable $84,401 3,600 Equity Ballister Dorth, Capital Total liabilities and equity 223 202 $311 203 Page 3 of 3