Professional Documents
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On March 31, 2010, the partnership that had been organized to operate the Lone Pine Café
was dissolved under unusual circumstances, and in connection with its dissolution,
preparation of a balance sheet became necessary.
The partnership was formed by Mr. and Mrs. Henry Antoine and Mrs. Sandra Landers,
who had become acquainted while working in a Portland, Oregon, restaurant.
On November 1, 2009, each of the three partners contributed $16,000 cash to
the partnership and agreed to share in the profits proportionally to their contributed capital
(i.e, one-third each). The Antoines’ contribution represented practically all of their saving.
Mrs. Landers’ payment was the proceeds of her late husband’s insurance policy.
On that day also the partnership signed a one-year lease to the Lone Pine Café, located in
a nearby recreational area. The monthly rent on the café was $1,500. This facility
attracted the partners in part because there were living accommodations on the floor above
the restaurant. One room was occupied by the Antoines and another by Mrs.
Landers.
CASE 2-3
LONE PINE CAFÉ (A)*
The partners borrowed $21,000 from a local bank and used this plus $35,000 of partnership
funds to buy out the previous operator of the café. Of this amount, $53,200 was
for equipment and $2,800 was for the food and beverages then on hand. The partnership
paid $1,428 for local operating licenses, good for one year beginning November 1,
and paid $1,400 for a new cash register. The remainder of the $69,000 was deposited in
a checking account.
Shortly after November 1, the partners opened the restaurant. Mr. Antoine was the cook, and
Mrs. Antoine and Mrs. Landers waited on customers. Mrs. Antoine also ordered the food,
beverages, and supplies, operated the cash register, and was responsible for the checking
account.
The restaurant operated throughout the winter season of 2009-2010. It was not very
successful. On the morning of March 31, 2010, Mrs. Antoine discovered that Mr. Antoine and
Mrs. Landers had disappeared. Mrs. Landers had taken all her possessions, but Mr. Antoine
had left behind most of his clothing, presumably because he could not remove it without
warning Mrs. Antoine. The new cash register and its contents were also missing. No other
partnership assets were missing. Mrs. Antoine concluded that the partnership was dissolved.
(The court subsequently affirmed that the partnership was dissolved as of March 30.)
CASE 2-3
LONE PINE CAFÉ (A)*
Mrs. Antoine decided to continue operating the Lone Pine Café. She realized that
an accounting would have to be made as of March 30 and called in Donald Simpson,
an acquaintance who was knowledgeable about accounting.
In response to Mr. Simpson’s questions, Mrs. Antoine said that the cash register had
contained $311 and that the checking account balance was $1,030. Ski instructors who were
permitted to charge their meals had run up accounts totaling $870. (These accounts
subsequently were paid in full.) The Lone Pine Café owed suppliers amounts totaling $1,583.
Mr. Simpson estimated that depreciation on the assets amounted to $2,445. Food and
beverages on hand were estimated to be worth $2,430. During the period of its operation, the
partners drew salaries at agreed-upon amounts, and these payments were up to date.
The clothing that Mr. Antoine left behind was estimated to be worth $750. The partnership
had also repaid $2,100 of the bank loan.
Mr. Simpson explained that in order to account for the partners’ equity, he would prepare
a balance sheet. He would list the items that the partnership owned as of March 30,
subtract the amounts that it owned as of March 30, subtract the amounts that it owed
to out-side parties, and the balance would be the equity of the three partners. Each
partner would be entitled to one-third of this amount.
LONE PINE CAFÉ
CASE 2-3
LONE PINE CAFÉ (A)*
Questions 1:
Mr. Antoine & Mrs. Landers were disappeared on the morning of March 31, 2010.
The Court affirmed the partnership was dissolved as of March 30, 2010
CASE 2-3
LONE PINE CAFÉ (A)*
Checking Account Balance calculation:
= Total Incoming Cash – Total Outgoing Cash
= (Partner’s Capital + Bank Loan) – (Equipment + Foods & Beverages + Licenses + Cash Register)
= ( $ 48,000 + $ 21,000) – ($ 53,200 + $ 2,800 + $ 1,428 + $ 1,400)
= ( $69,000) – ($ 58,828)
= $ 10,172
Equipment:
= Café Equiment + New Cash Register
= $ 53,200 + $ 1,400
= $ 54,600
Lone Pine Café
Statement of Financial Position
As of November 2, 2009
Assets Liabilities
Current Assets Bank Loan $ 21,000
Cash $ 10,172
Total Liabilities $ 21,000
Foods & Beverages $ 2,800
Prepaid expense $ 1,428
Total Current Assets $ 14,400
Owners’ Equity
Non Current Assets Mr. Antoine’s capital $ 16,000
Equipment $ 54,600 Mrs. Antoine’s capital $ 16,000
Total Non Current Assets $ 54,600 Mrs. Landers’s capital $ 16,000
Total Equity $ 48,000
Questions 2:
Prepaid Expense:
•
= $ 1,428 *7/12
= $ 833
Assets Liabilities
Current Assets Current Liabilities
Cash $ 1,341 Account Payable $ 1,583
Account Receivable $ 870 Non Current Liabilities
Food & Beverages $ 2,430 Bank Loan $ 18,900
Prepaid expense $ 833 Total Liabilities $ 20,483
Total Current Assets $ 5,474 Owners’ Equity
Non Current Assets Mr. Antoine’s Capital $ 12,382
Equipment s $ 54,600 Mrs. Antoine’s Capital $ 12,382
Less: Accum. Depreciation $ (2,445) Mrs. Landers’ Capital $ 12,382
Total Non Current Assets $ 52,155 Total Equity $ 37,146
Total Assets $ 57,629 $ 57,629
Total Liabilities & Equity
CASE 2-3
LONE PINE CAFÉ (A)*
Questions 3:
Current
Assumed
Assets Statement of Liquidation Value
Recovery
Financial Position
Cash $1,341 100% $1,341
Account Receivable $870 100% $870
Inventory $2,430 0% $0
Prepaid Expense $833 0% $0
Café Equipment $52,155 35% $18,254
TOTAL $57,629 $20,465
CASE 2-3 (Answer of Q3)
LONE PINE CAFÉ (A)*
Questions 1:
INFORMATION GIVEN:
1. Salary to Partners are booked directly as expense, and will hit the Income Statement.
Operating Expenses:
Salary to Partner $23,150
Part-Time Employee Wages $5,480
Telephone & Electricity Expense $3,270
Rent Expense $7,500
Depreciation Expense $2,445
Operating License Expense $595
Miscellaneous Expense $255
Total Operating Expenses $42,695
Earning Before Interest & Taxes -$10,314
Interest Expense $540
Net Income -$10,854
CASE 3-2 (Answer of Q1)
LONE PINE CAFÉ (B)*
2. Salary to Partners are not recognize as expense, but it will be recognized as Partners Drawing,
and will be recorded in Statement of Changes in Equity.
LONE PINE CAFÉ
INCOME STATEMENT
For Period of Nov 2, 2009 – March 30, 2010
Operating Expenses:
Part-Time Employee Wages $5,480
Telephone & Electricity Expense $3,270
Rent Expense $7,500
Depreciation Expense $2,445
Operating License Expense $595
Miscellaneous Expense $255
Total Operating Expenses $19,545
Earning Before Interest & Taxes $12,836
Interest Expense $540
Net Income $12,296
CASE 3-2 (Answer of Q1)
LONE PINE CAFÉ (B)*
STATEMENT OF CHANGES IN EQUITY
For Period of Nov 2, 2009 – March 30, 2010
Mr. Antoine’s Capital $16,000
Mrs. Antoine’s Capital $16,000
Mrs. Landers’s Capital $16,000
Total Partners Capital as of Nov 2, 2009 $48,000
Add:
Net Income (Nov 2, 2009 - Mar 30, 2010) $12,296
Deduct:
Salary to Mr. Antoine $7,717
Salary to Mrs. Antoine $7,717
Salary to Mrs. Landers $7,717
Total Partners' Drawings (Nov 2, 2009 – March 30, 2010) $23,150
Questions 2:
The income statement tells Mrs. Antoine that the partnership has suffered a $10,854 loss of operation.
It would appear that Lone Pine Café cannot support the three partners,
and Mrs. Antoine income is only from monthly salary.
In assessing the performance of a partnership, we need to pay attention to the Income Statement and
Statement of Changes in Equity. A profitable income statement does not mean it can create a
leverage of capital for all partners, hence the amount of the salary as well as the allocated drawing for the
period of the time needs to be put on consideration as well.
At the end, this method also tells Mrs. Antoine that the partnership has suffered a $10,854 loss.
PROBLEM 3-7
QED ELECTRONICS COMPANY
QED Electronic Company had the following transactions during April while conducting its television and
stereo repair business.
A new repair truck was purchased for $19,000.
Parts with a cost of $1,600 were received and used during April.
Service revenue for the month was $33,400, but only $20,500 was cash sales.
Wage costs for the month totaled $10,000; however $1,400 of this had not yet been paid to the employees.
Parts inventory from the beginning of the month was depleted by $2,100
Utility bills totaling $1,500 were paid. $700 of this amount was associated with March’s operations.
A provision for income taxes was established at $2,800, of which $2,600 had been paid to the federal
government.
Administrative and miscellaneous expenses were recorded at $4,700.
PROBLEM 3-7
QED ELECTRONICS COMPANY
Questions:
Revenue
Service Revenue $33,400
Total Revenue $33.400
Expenses
Bad Debt $ 645 =5% * (33400-20500)
Wages $10.000
Parts $ 3.700
=1600+2100
Utility $ 800
Depreciation $ 2.700
Selling $ 1.900
Administrative & Misc $ 4.700
Total Operating Expenses $24.445
Earning before interest & taxes $ 8.955
Interest Expense $ 880
Taxes $ 2.800
Net Income $ 5.275