Question

Debby Kauffman and her two colleagues, Jamie Hiatt and Ella rincon are personal trainers at an upscale health spa/resot in Tampa, Florida. They want to start a health club that specializes in health plants for people in the fifty plus range. The growing pop in this age range and strong consumer interest in the health benefits pf phsyical activity have convinced them they can proitably operate their own club. In addition to many other deicisions, they need to determine what type of business organization they want. Jamie believes there are more advantages to the corporate form than a partnership, but he hasn't yet convince Debby and Ella. They have come to you, a small business consulting specialist, seeking information and advice regarding the choice of starting a parnership versus a corporation

A) Prepare a memo (dated May 26, 2016) that describes the advantages and disadvantages of both partnerships and corporations. Advice Debby, Jamie and Ella regarding which organizaation form you believe would better serve their purposes. Make sure to include reasons supporting your advice.

Part II After deciding to incorporate, each of the three investors receives 20,000 shares of $2 par common stock on june 12, 2016 in exchange for their co- owned building ($ 200,000 fair value) and $100,000 total cash they contributed to the business. THe next diecision that Debby, Jamie, and Ella need to make is how to obtain financing for renovation and equipment. They understand the difference between equity securities and debt securities, but do not understnad the tax, net income, and earnings per share consequences of equity versus debt financing on the future of their business.

B. prepare notes for a discussion with the three entrepreneurs inw hich you will compare the consequeneces of using equity versus debt financing. As part of your notes show the differences in interest and tax expense assuming $1,400,000 is financed with common stock, and then alternatively with debt. Assume that when common stock is used 140,000 shares will be issued. When debt is used, assume the interest rate on debt is 9% the tax rate is 32& and income before interest and taxes is 300,000

Part III During the discusison about financing, Ella mentions that one of her cleints, Timothy Hansen has approached her about buying a significant interest in a new club. Having an interest investor sways the three to issue equity securities to provide the financing they need. On July 21, 2016, Mr Hansen buys 90,000 shares at a price of $10 per share.The club LIfePath Fitness opens on January 12, 2017 and after a slow start begins to produce the revenue desired by the owners. The owners decide to pay themselves stock dividend sinc cahs has been less than abundenat since they opened their doors. The 10% stock dividedn is declared by the owners on July 27, 2017. The market price of the stock is $3 on the delcaration date. The date of the record is July 31, 2017 and the issue date is August 15, 2017. By the middle of the fourth quarter of 2017, the cash flow of lifepath fitness has improved to the point that the owners feelready to pay themselves a cash dividend. They declare a $0.05 cash dividend on December 4, 2017. THe record date is december 14, 2017 and the payment is december 24, 2017.

Record all the transactions related to the common stock of lifepath fitness duuring the years 2016 and 2017 (2) indicate how many shares are issued and outstanding after the stock dividend is issued.

Part IV since the club opened a major concern is the pool facilities. Although the existing pool is good D, J and E all desire to make Lifepath a cutting edge facility. Until the end of of 2017 financing concerns prevented this improvement. However because there has been steady growth in clientele, revenue, and income since the third quarter of 2017 the owners have explored possible financing options. They are hesitant to issue stock and change the ownership mix because they ahve been able to work together as team with great effectivenss. They have formulated a plan to issue secured term bonds to raise the needed $600,000 for the pool facilities. By the end of December 2017 Everything was in place for the bond issue to go ahead. On Jaunaruy 1, 2018 the bonds were issued for $548,000. The bonds pay annual interest of 6 percent on January 1 of each year. THe bonds mature in 10 years, and amortization is computed using the straight line method.

Record the issuance of the secured bonds, the ajdusting entry required at December 31, 2018, the interest payment mad eon Junuary 1, 2019, and the interest accrued on December 31, 2019.

Part V

Mr Hansen's purchase of the stock of lifepath fitenss was done through his business. The stock investment has always been accounted for using the cost method on his firm's books. However eaerly in 2019 he decided to take his company public. He is preparing an IPO and he needs to have ther firms financial statements audited. One of the issues to be resolved is to restate the stock investment in LifePath Fitness using the equity method since Mr. Hansen's ownership percentage is greater than 20%

Give the entries that would have been made onHansens books if the quity method of accounting for investments had been used form the intial investment though 2018. Assume the follwing data for Life Path

2016 2017 2018

Net Income $30,000 $70,000 $105000

Total cash Dividends $2,100 $20,000 $50,000

Compute the balance of stock investment account as it relates to lifepath fitness at the end of 2018

Answer 1

Answer

Debby, Jamie and Ella should choose corporation form over partnership form of business. Advantages for choosing this form are as follow:

1.

The liability in the partnership firm is unlimited. In case of bankruptcy, the partners are liable to pay the loan from their personal property. But in the case of shareholders' liabilities of corporations, limited to the nominal value of the shares. In case of liquidation, private property is not attached to paying commercial property.

2.

In the case of business expansion, the partnership firm depends on colleagues for making finance. But in the case of corporations, money and loans can be generated from external sources of debt.

Particulars	Common Stock	Debt
Income before interest and tax Less: interest(1400000*9/100) Income before tax Less: tax 32% on income before tax Income after tax Number of shares Earning per share	300000 (---) 300000 (96000) 204000 200000 1.02	300000 (126000) 174000 (55680) 118320 60000 1.972

Total shares = (20000*3) + 140000

in case on debt there is tax benefit on interst and earning per share is also higher. So debt should be choosen.