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BUSINESS CASE

ACCTBA2
DECISION MAKING ACROSS THE ORGANIZATION
Richard Powers and Jane Keckley, two professionals in the finance area, have
worked for Eberhart Leasing for a number of years. Eberhart Leasing is a company that
leases high-tech medical equipment to hospitals. Richard and Jane have decided that,
with their financial expertise, they might start their own company to provide consulting
services to individuals interested in leasing equipment. One form of organization they are
considering is a partnership.
If they start a partnership, each individual plans to contribute P2 million in cash. In
addition, Richard has a used IBM computer that originally cost P148,000, which he intends
to invest in the partnership. The computer has a present market value of P60,000.
Although both Richard and Jane are financial wizards, they do not know a great
deal about how a partnership operates. As a result, they have come to you for advice.

Table 1. Contribution of Each Partner


CONTRIBUTIONS:
Cash
Equipment (Present Market
Value)
TOTAL:

RICHARD POWERS

JANE KECKLEY

P 2,000,000

P 2,000,000

P 60,000

___

P 2,060,000

P 2,000,000

1. What are the major disadvantages of starting a partnership? What type of document
is needed for a partnership, and what should this document contain?
A partnership is a group of two or more people that contribute money, property and
industry into a common or shared fund with the intention of dividing the profits earned
amongst themselves.

In starting a partnership, there are advantages and disadvantages. The major


disadvantages that comes to it are a partnership may be easily dissolved or has a limited
life, there is unlimited liability which deters the capitalist to invest in the business, wrongful
acts of a partner may affect or subject the other partners to personal liabilities, the
authority is divided among the partners and there is the likelihood of dissension and
disagreement among the partners. Furthermore, a partnership needs a document called
Articles of Co-Partnership. It is a written agreement or document that specifies the
partnerships nature, terms and details of its business operations. This document contains:
the name of the partnership, names and addresses of the partners and the classifications
of the partners, effective date of the contract, the purpose and place of the business, rights
and duties of each partner, the manner of dividing the profits and losses including
allowances and interests among the partners, the conditions in which the partner may
withdraw money or other assets for personal use, the manner of book keeping of the
accounts, the causes for dissolution and the provision of the arbitration in setting disputes.

2. Both Richard and Jane plan to work full-time in the new partnership. They believe
that net income or net loss should be shared equally. However, they are wondering
how they can provide compensation to Richard Powers for his additional investment
of the computer. What would you tell them?
As Richard and Jane plans to work full-time in the new partnership, they consider to
share the net income and net loss equally. However, due to Richards additional
investment of a computer to the partnership and to provide compensation for it, I would tell
them that they may divide the net income and net loss based on their capital contributions.
As it is stated in the rules of distribution of profits and losses, it maybe in the accordance of
an agreement between the partners or it maybe divided based on the capital contributions
of the partners. It seems fair to base the division on their capital contributions since
Richard and Jane does not have equal capital contribution to the partnership.

3. Richard is not sure how the computer equipment should be reported on his tax
return. What would you tell him?

A tax return is a form used by those who are in charge of taxes to calculate the tax
liabilities of a business or individual. It is also wherein the taxpayer reports his or her
annual statement of income, personal conditions and other expenses.
For Richard to report the computer equipment on his tax return, I would tell him that
the computer equipment will be reported under the share of income he has in the
partnership since the equipment was used to earn profits and to provide services in the
partnership. His tax return report must contain the share he has in the partnerships
income and losses as well as the expenses made.

4. As indicated above, Richard and Jane have worked together for a number of years.
Richards skills complement Janes and vice versa. If one of them dies, it will be
very difficult for the other to maintain the business, not to mention the difficulty of
paying the deceased partners estate for his or her partnership interest. What would
you advise them to do?
Dissolution may occur in a partnership. It is a situation wherein a partner ceases to
be a part of the partnership or in carrying out the business. The causes for dissolution may
be because of an admission of a new partner, retirement, removal, death, incapacity or
bankruptcy of a partner.
Regarding with Richard and Jane, both complementing each others skill, if one dies
dissolution will occur. Thus, it would be advisable for them to look for a successor or
replacement. Though before one dies, they may also look for a probable new partner/s
that would complement one or both of their skills to avoid the difficulty in running the
business as well as who are willing to invest with the equally or more than the amount
they invested in the partnership to avoid having conflict when it comes to paying the
deceased partners interest in the business.