Because Natalie has been so successful operating Cookie Creations, Katy would like to have Natalie become her partner. Katy believes that together they will create a thriving cookie-making business. Recall that Katy is Natalie's high school friend and has been operating her bakery for approximately 10 months. Natalie is quite happy with her current business set-up. Up until now, she had not considered joining forces with anyone. From past meetings with Katy, however, Natalie has gathered the following information about Katy's business and compared it with her own results.
€¢ The current fair values of the assets and liabilities of both businesses are as follows:

All assets would be transferred into the partnership. The partnership would assume all of the liabilities of the two proprietorships. The Baker's Nook bank loan is due on October 31, 2015.
€¢ Katy operates her business from leased premises. She has just signed a lease for 12 months. Monthly rent will be $1,000; Katy's landlord has agreed to draw up a new lease agreement that would be signed by both partners.
€¢ Katy has no assets and has a lot of student loans and credit card debt. Natalie's assets consist of investments in Canada Savings Bonds. Natalie has no personal liabilities.
€¢ Katy is reluctant to have a partnership agreement drawn up. She thinks it's a waste of both time and money. As Katy and Natalie have been friends for a long time, Katy is confident that all problems can be easily resolved over a nice meal.
Natalie believes that it may be a good idea to establish a partnership with Katy. She comes to you with the following questions:
1. Do I really need a formalized partnership agreement drawn up? What would be the point of having one if Katy and I agree on all major decisions? What type of information should the partnership agreement contain?
2. I would like to have Katy contribute the same amount of capital as I am contributing. How much additional cash, in addition to the amount in Katy's proprietorship, would Katy have to borrow to invest in the partnership so that she and I have the same capital balances?
3. Katy 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?
4. What other issues should I consider before I say yes or no to Katy?
Instructions
(a) Answer Natalie's questions.
(b) Assume that Natalie and Katy go ahead and form a partnership called Cookie Creations and More on August
1, 2014, and that Katy is able to borrow the additional cash she needs to contribute to the partnership. Prepare a balance sheet for the partnership at August 1.

The Baker's Nook Cookie Creations $8,050 800 1,200 Cash Accounts receivable Merchandise inventory Supplies Equipment Bank loan payable $1,500 5,250 500 350 7,500 10,000 450 1,500