Question 3 Sandra's high school friend, Karen Peterson, has been operating a bakery for approximately 18 months. Because Sandra has been so successful operating Cookie Creations, Karen would like to have Sandra become her partner. Karen believes that together they will create a thriving cookie- making business. Sandra is quite happy with her current business set-up. Until now, she had not considered joining forces with anyone. From past meetings with Karen, Sandra has gathered the following information about Karen's business and compared it to her own results. The current market values of the assets and liabilities of both businesses are as follow. Cookie Creations $ 10,000 Cash Allowance for bad debts Inventory Equipment Loan (repayable 2021) The Baker's Nook S 1,500 750 450 7,500 10,000 1.200 1,000 All assets would be transferred into the partnership. The partnership would assume all of the liabilities of the two proprietorships. Additional information: Karen operates her business from leased premises. She has just signed a lease for 12 months. Monthly rent will be $1,000. Karen's landlord has agreed to draw up a new lease agreement that would be signed by both partners. Karen is reluctant to have a partnership agreement drawn up. She thinks it's a waste of both time and money. As Karen and Sandra have been friends for a long time. Karen is confident that any problems that arise can be easily resolved over a nice meal. Sandra thinks that it may be a good idea to establish a partnership with Karen. She comes to you with the following questions. Required: (a) Do I really need a formalized partnership agreement drawn up? What would be the point of having one if Karen and I agree on all major decision? (5 marks) (b) (c) "I would like to have Karen contribute the same amount of capital as I am contributing. How much additional cash, in addition to the amount in Karen's proprietorship, would Karen have to borrow to invest in the partnership so that she and I have the same capital balance?" (6 marks) Karen has a lot of personal debt. Should this affect my decision about whether or not to go forward with this business venture? Why or why not?" (6 marks) "What other issues should I consider before I say yes or no to Karen?" (8 marks) (Total: 25 marks)