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Presentation/PPT
27/08/2022
Part1:Mindy Feldkamo and her two colleagues, Oscar Lopez and Lori Melton, are personal trainers at an upscale health spa/resort in Tampa, Florida. They want to start a health club that specializes in health plans for people in the 50+ age range. The growing population in this age range and strong consumer interest in the health benefits of physical activity have convinced them they can profitably operate their own club. In addition to many other decisions, they need to determine what type of business organization they want. Oscar believes there are more advantages to the corporate form than a partnership, but he hasn’t yet convinced Mindy and Lori. They have come to you, a small business consulting specialist, seeking information and advice regarding the choice of starting a partnership versus a corporation.Part 1:After deciding to incorporate each of the three investors receives 20,000 shares of $2 par common stock on June 12, 2007, in exchange for their co-owned building ($200,000 market value) and $100,000 total cash they contributed to the business. The next decision that Mindy, Oscar, and Lori 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 understand 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 in which you will compare the consequences 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 in 9%, the tax rate is 32%, and income before interest and taxes is $300,000. (You may want to use electronic spreadsheet).Part 2:During the discussion about financing, Lori mentions that one of her clients, Roberto Marino, has approached her about buying a significant interest in the new club. Having an interested investor sways the three to issue equity securities to provide the financing they nee. On July 21, 2007, Mr. Marino buys 90,000 shares at a price of $10 per shares.The club, LifePath Fitness, open on January 12, 2008, and after a slow start begins to produce the revenue desired by the owners. The owners decide to pay themselves a stock dividend, since cash has been less than abundant since they opened their doors. The 10% stock dividend is declared by the owners on July 27, 2008. The market value of the stock is $3 on declaration date. The date of record is July 31, 2008 (there have been no changes in stock ownership since the initial issuance), and the issue date is August 15, 2008. By the middle of the fourth quarter of 2008, the cash flow of LifePath Fitness hs improved to the point that the owners feel ready to pay themselves a cash dividend. They declare a $0.05 cash dividend on December 4, 2008. The record date is December 14, 2008, and the payment date is December 24, 2008.c). Record all of the transactions related to the common stock of LifePath during the years 2007 and 2008. 2). Include how many shares are issued and outstanding after the stock dividend is issued.PART 3:Since the club opened, a major concern has been the pool facilities. Although the existing pool is adequate, Mindy, Oscar, and Lori all desire to make LifePath a cutting-edge facility. Until the end of 2008, financing concerns prevented this improvement. However, because there has been explored possible financing options. They are hesitant to issue stock and change the ownership mix because they have been able to work together as a team with great effectiveness. They have by the end of Apirl 2009 everything was in place for the bond issue to go ahead. On june 1, 2009, the bonds were issued for 548,000. The bonds pay semiannual interest of 3% (6% annual) on December 1 and June 1 of each year. The bonds mature in 10years, and amortization is computed using the straight-line method.d). Record (1) the issuance of the secured bonds, (2) the interest payment made on December 1, 2009. 3). The adjusting entry required at December 31, 2009, and 4) the interest payment made on June 1, 2010;PART 4.Mr. Marino’s purchase of LifePath was done through his business. The investment has always been accounted for using the cost method on his firm’s books. However, early in 2010 he decided to take his company public. He is preparing an IPO(initial public offering), and he needs to have the firm’s financial statements audited. One of the issues to be resolved is to restate the investment in LifePAth Fitness using the equity method, since Mr. Marino’s ownership percentage is greater than 20%.e). Give the entries that would have been made on Marino’s books if the equity method of accounting for investments had been used since the initial investment. Assume the following data for LifePath.2009$105,000$50,0002.) Compute the balance in the LifePath Investment account at the end of 2009
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