Question

Toady and Froggy were running a vegan cafe together. The business was having financial difficulties.Betelguese, who has known Toady and Froggy for many years had recently inherited a lot of money and Toady and Froggy asked him to lend the business $100 000 to enable them to buy sufficient stock and to upgrade the cafe for the summer season. Betelguese wanted to help his friends but also wanted to ensure that he would get his money back. He agreed to lend Toady and Froggy the money in return for a payment of $10 000 per year out of the gross returns of the cafe. The terms of the loan also provided that Toady and Froggy would consult Betelgeuse about any major contracts entered into by the business and gave him a right to inspect the accounts at regular interval.

Required:

a. Discuss whether or not a partnership exists between Toady, Froggy and Betelgeuse?

b. Would it make any difference if the terms of the loan provided for Betelgeuse to be paid $10 000 per year out of the profits of the business?

Answer 1

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a. yes partnership will exist between Toady, Froggy, and Betelgeuse because before the taking loan from Betelgeuse they run vegan cafe in partnership and after facing financial difficulties then both of them take a decision to include Betelgeuse in their business by means of loan and make a contract with each other to pay their loan at 10000$ per year from their gross returns of the cafe with giving information and consult with Betelgeuse, they gave him a right to inspect the accounts at regular interval. So their partnership also exists.

b. Yes, it makes a ripple effect if the terms of the loan provided for Betelgeuse to be paid 10000$ per year because they take a loan from Betelgeuse to make more assets for their business while they are facing financial issues. Increasing partner in their business to pay loan make lower their profits of the business and they share their business capital with Betelgeuse. But Betelgeuse loan amount which is lower in cost of loan interest provides more stability or their business and increases the chances of making a higher profit, make more assets, increase their inventory, management services.