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Chapter 16
Partnership Liquidation
Multiple Choice
6. Offsetting a partner's loan balance against his debit capital balance is referred to as the
a. marshaling of assets.
b. right of offset.
c. allocation of assets.
d. liquidation of assets.
7. If a partner with a debit capital balance during liquidation is personally solvent, the
a. partner must invest additional assets in the partnership.
b. partner's debit balance will be allocated to the other partners.
c. other partners will give the partner enough cash to absorb the debit balance.
d. partnership will loan the partner enough cash to absorb the debit balance.
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16-2 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
8. The following condensed balance sheet is presented for the partnership of Jim, Bill, and Fred who
share profits and losses in the ratio of 4:3:3, respectively:
Cash $ 180,000
Other assets 1,940,000
Jim, receivable 60,000
$ 2,180,000
Assume that the assets and liabilities are fairly valued on the balance sheet and that the partnership
decides to admit Tom as a new partner, with a 25% interest. No goodwill or bonus is to be recorded.
How much should Tom contribute in cash or other assets?
a. $270,000
b. $405,000
c. $540,000
d. $520,000
9. The partnership of Joe, Al, and Mike shares profits and losses 60%, 30%, and 10%, respectively. On
January 1, 2011, the partners voted to dissolve the partnership, at which time the assets, liabilities,
and capital balances were as follows:
Assume that all noncash assets are sold for $840,000 and all available cash is distributed in final
liquidation of the partnership. Cash should be distributed to the partners as follows
a. Joe, $744,000; Al, $372,000; Mike, $124,000.
b. Joe, $440,000; Al, $380,000; Mike, $200,000.
c. Joe, $224,000; Al, $272,000; Mike, $164,000.
d. Joe, $396,000; Al, $198,000; Mike, $66,000.
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10. The partnership of Pratt, Ellis, and Mack share profits and losses in the ratio of 4:4:2, respectively.
The partners voted to dissolve the partnership when its assets, liabilities, and capital were as
follows:
Assets
Cash $ 250,000
Other assets 1,000,000
$1,250,000
The partnership will be liquidated over a prolonged period of time. As cash is available, it will be
distributed to the partners. The first sale of noncash assets having a book value of $600,000 realized
$475,000. How much cash should be distributed to each partner after this sale?
a. Pratt, $90,000; Ellis, $140,000; Mack, $295,000
b. Pratt, $210,000; Ellis, $290,000; Mack, $145,000
c. Pratt, $290,000; Ellis, $210,000; Mack, $105,000
d. Pratt, $150,000; Ellis, $175,000; Mack, $200,000
11. In a partnership liquidation, the final cash distribution to the partners should be made in accordance
with the:
a. partners' profit and loss sharing ratio.
b. balances of the partners' capital accounts.
c. ratio of the capital contributions by the partners.
d. ratio of capital contributions less withdrawals by the partners.
12. In an advance plan for installment distributions of cash to partners of a liquidating partnership, each
partner's loss absorption potential is computed by
a. dividing each partner's capital account balance by the percentage of that partner's capital
account balance to total partners' capital.
b. multiplying each partner's capital account balance by the percentage of that partner's capital
account balance to total partners' capital.
c. dividing the total of each partner's capital account less receivables from the partner plus
payables to the partner by the partner's profit and loss percentage.
d. some other method.
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16-4 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
14. During the liquidation of the partnership of Karr, Rice, and Long. Karr accepts, in partial settlement
of his interest, a machine with a cost to the partnership of $150,000, accumulated depreciation of
$70,000, and a current fair value of $110,000. The partners share net income and loss equally. The
net debit to Karr's account (including any gain or loss on disposal of the machine) is
a. $90,000.
b. $100,000.
c. $110,000.
d. $150,000.
15. X, Y, and Z have capital balances of $90,000, $60,000, and $30,000, respectively. Profits are
allocated 35% to X, 35% to Y, and 30% to Z. The partners have decided to dissolve and liquidate
the partnership. After paying all creditors, the amount available for distribution is $60,000. X, Y,
and Z are all personally solvent. Under the circumstances, Z will
a. receive $18,000.
b. receive $30,000.
c. personally have to contribute an additional $6,000.
d. personally have to contribute an additional $36,000.
16. The ABC partnership has the following capital accounts on its books at December 31, 2011:
Credit
A, Capital $400,000
B, Capital 240,000
C, Capital 80,000
All liabilities have been liquidated and the cash balance is zero. None of the partners have personal
assets in excess of his personal liabilities. The partners share profits and losses in the ratio of 3:2:5.
If the noncash assets are sold for $400,000, the partners should receive as a final payment:
a. A, $304,000; B, $176,000; C, $80,000
b. A, $256,000; B, $144,000; C, $-0-
c. A, $304,000; B, $176,000; C, $-0-
d. A, $120,000; B, $80,000; C, $200,000
17. The summarized balances of the accounts of MNO partnership on December 31, 2011, are as
follows:
The agreed upon profit/loss ratio is 50:40:10, respectively. Using the information given above,
which one of the following amounts, if any, is the loss absorption potential of partner N as of
December 31, 2011?
a. $20,000
b. $35,000
c. $75,000
d. $120,000
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18. Adamle, Boyer, and Clay are partners with a profit and loss ratio of 4:3:3. The partnership was
liquidated and, prior to the liquidation process, the partnership balance sheet was as follows:
After the partnership was liquidated and the cash was distributed, Boyer received $96,000 in cash in
full settlement of his interest.
19. The partnership of Hall, Jones, and Otto has been dissolved and is in the process of liquidation. On
July 1, 2011, just before the second cash distribution, the assets and equities of the partnership along
with residual profit sharing ratios were as follows:
Assume that the available cash is distributed immediately, except for a $25,000 contingency fund
that is withheld pending complete liquidation of the partnership. How much cash should be paid to
each of the partners?
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16-6 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
20. The partnership of Hall, Jones, and Otto has been dissolved and is in the process of liquidation. On
July 1, 2011, just before the second cash distribution, the assets and equities of the partnership along
with residual profit sharing ratios were as follows:
Assume that Hall takes equipment with a fair value of $40,000 and a book value of $50,000 in
partial satisfaction of his equity in the partnership. If all the $200,000 cash is then distributed, the
partners should receive:
Hall Jones Otto
a. $100,000 $60,000 $40,000
b. 25,000 15,000 10,000
c. -0 45,000 5,000
d. -0 50,000 -0
21. The partnership of Starr, Foley, and Pele share profits and losses in the ratio of 4:4:2, respectively.
The partners voted to dissolve the partnership when its assets, liabilities, and capital were as follows:
The partnership will be liquidated over a prolonged period of time. As cash is available, it will be
distributed to the partners. The first sale of noncash assets having a book value of $360,000 realized
$285,000. How much cash should be distributed to each partner after this sale?
a. Starr, $54,000; Foley, $84,000; Pele, $177,000.
b. Starr, $174,000; Foley, $174,000; Pele, $87,000.
c. Starr, $126,000; Foley, $126,000; Pele, $63,000.
d. Starr, $90,000; Foley, $105,000; Pele, $120,000.
22. A, B, and C have capital balances of $90,000, $60,000, and $30,000, respectively. Profits are
allocated 35% to A, 35% to B and 30% to C. The partners have decided to dissolve and liquidate the
partnership. After paying all creditors the amount available for distribution is $60,000. A, B, and C
are all personally solvent. Under the circumstances, C will
a. receive $18,000.
b. receive $30,000.
c. personally have to contribute an additional $6,000.
d. personally have to contribute an additional $36,000.
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23. The ABC partnership has the following capital accounts on its books at December 31, 2011:
Credit
A, Capital $200,000
B, Capital 120,000
C, Capital 40,000
All liabilities have been liquidated and the cash balance is zero. None of the partners have personal
assets in excess of his personal liabilities. The partners share profits and losses in the ratio of 3:2:5.
If the noncash assets are sold for $150,000, the partners should receive as a final payment:
a. A, $152,000; B, $88,000 C, $40,000
b. A, $128,000; B, $72,000; C, $ - 0 -
c. A, $152,000; B, $88,000; C, $ - 0 -
d. A, $60,000; B, $40,000; C, $100,000
24. The summarized balances of the accounts of RST partnership on December 31, 2011, are as follows:
Assets Liabilities and Equity
Cash $ 30,000 Liabilities $ 30,000
Noncash 180,000 R, Capital 90,000
S, Capital 60,000
T, Capital 30,000
Total Assets $210,000 Total Lia & Equities $210,000
The agreed upon profit/loss ratio is 50:40:10, respectively. Using the information given above,
which one of the following amounts, if any, is the loss absorption potential of partner S as of
December 31, 2011?
a. $60,000
b. $70,000
c. $150,000
d. $240,000
25. The partnership of Hill, Kiner, and Polk has been dissolved and is in the process of liquidation. On
July 1, 2011, just before the second cash distribution, the assets and equities of the partnership along
with residual profit sharing ratios were as follows:
Assets Liabilities and Equity
Cash $ 80,000 Liabilities $ 60,000
Receivables-net 20,000 Hill, Capital 50% 40,000
Inventories 60,000 Kiner, Capital 30% 70,000
Equipment-net 40,000 Polk, Capital 20% 30,000
Total assets $200,000 Total Lia & Equity $200,000
Assume that the available cash is distributed immediately, except for a $10,000 contingency fund
that is withheld pending complete liquidation of the partnership. How much cash should be paid to
each of the partners?
Hill Kiner Polk
a. $35,000 $21,000 $14,000
b. $5,000 $3,000 $4,000
c. $0 $10,000 $0
d. $0 $6,000 $4,000
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16-8 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
Problems
16-1 The NOR Partnership is being liquidated. A balance sheet prepared prior to liquidation is presented
below:
Nen, Ott, and Reese share profits and losses in a 40:40:20 ratio. All partners are personally
insolvent.
Required:
A. Prepare the journal entries necessary to record the distribution of the available cash.
B. Prepare the journal entries necessary to record the completion of the liquidation process,
assuming the other assets are sold for $120,000.
16-2 The trial balance for the ABC Partnership is as follows just before liquidation:
Required:
Prepare an advance cash distribution plan showing how available cash would be distributed.
16-3 Lewis, Nance, and Otis operate the LNO Partnership. The partnership agreement provides that the
partners share profits in the ratio of 40:40:20, respectively. Unable to satisfy the firm's debts, the
partners decide to liquidate. Account balances just prior to the start of the liquidation process are as
follows:
Debit Credit
Cash $ 90,000
Other Assets 330,000
Liabilities $165,000
Otis, Loan 36,000
Lewis, Capital 165,000
Nance, Capital 36,000
Otis, Capital 39,000
Otis, Drawing 21,000 _______
Totals $441,000 $441,000
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During the first month of liquidation, other assets with a book value of $150,000 are sold for
$165,000, and creditors are paid. In the following month unrecorded liabilities of $12,000 are
discovered and assets carried on the books at a cost of $90,000 are sold for $36,000. During the
third month the remaining other assets are sold for $42,000 and all available cash is distributed.
Required:
Prepare a schedule of partnership realization and liquidation. A safe distribution of cash is to be
made at the end of the second and third months. The partners agreed to hold $30,000 in cash in
reserve to provide for possible liquidation expenses and/or unrecorded liabilities. All of the partners
are personally insolvent.
16-4 Due to the fact that the partnership had been unprofitable for the past several years, A, B, C, and D
decided to liquidate their partnership. The partners share profits and losses in the ratio of
40:30:20:10, respectively. The following balance sheet was prepared immediately before the
liquidation process began:
A B C D Partnership
Balance Sheet
The partnership's other assets are sold for $100,000 cash. The partnership operates in a state which
has adopted the Uniform Partnership Act.
Required:
A. Complete the following schedule of partnership realization and liquidation. Assume that a
partner makes additional contributions to the partnership when appropriate based on their
individual status.
OTHER CAPITAL
CASH ASSETS LIABILITIES __A__ __B__ __C__ __D__
$100,000 $350,000 $250,000 55,000 60,000 50,000 35,000
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16-10 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
B. Complete the following schedule to show the total amount that will be paid to the personal
creditors.
16-5 A trial balance for the DEF partnership just prior to liquidation is given below:
Debit Credit
Cash $ 75,000
Noncash Assets 750,000
Nonpartner Liabilities $240,000
Dugan, Loan 75,000
Dugan, Capital 225,000
Elston, Capital 153,000
Flynn, Capital 132,000
Totals $825,000 $825,000
Required:
Prepare an advance cash distribution plan for the partners.
16-6 David, Paul, and Burt are partners in a CPA firm sharing profits and losses in a ratio of 2:2:3,
respectively. Immediately prior to liquidation, the following balance sheet was prepared:
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Required:
Assuming the noncash assets are sold for $300,000, determine the amount of cash to be distributed
to each partner. Complete the worksheet and clearly indicate the amount of cash to be distributed to
each partner in the spaces provided. No cash is available from any of the three partners.
16-7 Using the information from Problem 16-6, assume the noncash assets are sold for $160,000.
Determine the amount of cash to be distributed to each partner assuming all partners are personally
solvent.
16-8 The December 31, 2010, balance sheet of the Deng, Danielson, and Gibson partnership, along with
the partners residual profit and loss sharing ratios, is summarized as follows:
The partners agree to liquidate their partnership as soon as possible after January 1, 2011 and to
distribute all cash as it becomes available.
Required:
Prepare an advance cash distribution plan to show how cash will be distributed as it becomes
available.
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16-12 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
Short Answer
1. The Uniform Partnership Act specifies specific steps in distributing available partnership assets in
liquidation. Describe the steps used to distribute partnership assets during the liquidation process.
2. An advance cash distribution plan specifies the order in which each partner will receive cash and the
dollar amount each will receive as it becomes available for distribution. Identify the four steps in the
preparation of an advance cash distribution plan.
1. Why are realization gains or losses allocated to partners in their profit and loss ratios?
2. In what manner should the final cash distribution be made in partnership liquidation?
3. Why does a debit balance in a partners capital account create problems in the UPA order of
payment for a partnership liquidation?
4. Is it important to maintain separate accounts for a partners outstanding loan and capital ac-
counts? Explain why or why not.
5. Discuss the possible outcomes in the situation where the equity interest of one partner is
inadequate to absorb realization losses.
6. During a liquidation, at which point may cash be distributed to any of the partners?
8. To what extent can personal creditors seek re-covery from partnership assets?
9. In an installment liquidation, why should the partners view each cash distribution as if it were
the final distribution?
10. Discuss the three basic assumptions necessary for calculating a safe cash distribution. How is
this safe cash distribution computed?
11. How are unexpected costs such as liquidation expenses, disposal costs, or unrecorded liabilities
covered in the safe distribution schedule?
12. What is the objective of the procedures used for the preparation of an advance cash distribution
plan?
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16-14 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
ANSWER KEY
Multiple Choice
1. b 8. c 15. c 22. c
2. c 9. c 16. b 23. b
3. d 10. a 17. c 24. c
4. c 11. b 18. d 25. c
5. d 12. c 19. c
6. b 13. a 20. d
7. a 14. b 21. a
Problems
Liabilities 160,000
Cash 160,000
B.
Cash 120,000
Nen, Capital ($180,000 .40) 72,000
Ott, Capital ($180,000 .40) 72,000
Reese, Capital ($180,000 .20) 36,000
Other Assets 300,000
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Asset Distribution
Adler Ball Carl
Profit-Loss Ratio .50 .30 .20
Net capital interest $420,000 $180,000 $180,000
Distribution to Cole 12,000
Balances after distribution 420,000 180,000 168,000
Distribution to Adams & Cole _120,000 _ 48,000
Balances after distribution $300,000 $180,000 $120,000
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16-16 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
Capital Interest
Lewis Nance = Otis
Balances (165,000) (36,000) = (54,000)
Sale of assets (6,000) (6,000) (3,000)
(171,000) (42,000) = (57,000)
Distribute cash to creditors
(171,000) (42,000) = (57,000)
Record liabilities 4,800 4,800 2,400
(166,200) (37,200) = (54,600)
Sale of assets 21,600 21,600 10,800
(144,600) (15,600) (43,800)
Distribute cash 75,000 9,000
(69,600) (15,600) (34,800)
Sale of assets 19,200 19,200 9,600
(50,400) 3,600 (25,200)
Allocate Nance's deficit 2,400 (3,600) 1,200
(48,000) -0- (24,000)
Distribute cash 48,000 24,000
Balances -0- -0- -0-
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16-4 A.
Other
Cash Assets = Liabilities
Account Balances 100,000 350,000 = (250,000)
Sale of Assets 100,000 (350,000)
200,000 -0- = (250,000)
Allocated Debit
Balance of B* 200,000 -0- = (250,000)
Investment from C 10,000
Investment from A 45,000
255,000 -0- (250,000)
Distribute Cash (255,000) 250,000
-0- -0- -0-
Capital
A B C D
.4 .3 .2 .1
Account Balances (55,000) (60,000) (50,000) (35,000)
Sale of Assets 100,000 75,000 50,000 25,000
45,000 15,000 -0- (10,000)
Allocate Debit
Balance of B* (15,000) 10,000 5,000
45,000 -0- 10,000 (5,000)
Investment from C (10,000)
Investment from A (45,000)
-0- -0- -0- (5,000)
Distribute Cash 5,000
-0- -0- -0- -0-
*Allocate only to C and D, since A is able to contribute only $45,000 from personal assets.
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16-18 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
16-6
Noncash David Paul Burt
Cash Assets Liabilities Capital Capital Capital
Beginning Balance 100,000 580,000 280,000 160,000 160,000
80,000
Sale of Assets 300,000 (580,000) (80,000) (80,000)
(120,000
Balances 400,000 -0- 280,000 80,000 80,000
(40,000)
Pay Liabilities (280,000) (280,000)
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16-20 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
16-7
Noncash David Paul Burt
Cash Assets Liabilities Capital Capital Capital
Beginning Balance 100,000 580,000 280,000 160,000 160,000
80,000
Sale of Assets 160,000 (580,000) (120,000) (120,000)
(180,000)
Balances 260,000 -0- 280,000 40,000 40,000
(100,000)
Cash payment from Burt 100,000
100,000
Balances 360,000 -0- 280,000 40,000 40,000
-0-
Pay Liabilities (280,000) (280,000)
16-8
Asset Distribution
Deng Danielson Gibson
Net capital interest $250,000 $450,000 $375,000
Distribution to Danielson __75,000 ___ ___
Balances 250,000 375,000 375,000
Distribution to Deng & Danielson (100,000) (150,000)
_______
Balances $150,000 $225,000 $375,000
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Short Answer
1. The first step in the liquidation process is to compute any net income/loss up to the date of dissolution.
Any net income/loss is allocated to the partners according to their profit and loss agreement. In the
next step, the assets that are not acceptable for distribution in their present form are converted into
cash, and any gains/losses realized are allocated according to the profit and loss ratio. The last step is
to distribute the available cash to creditors and partners.
1. Realization gains or losses are allocated to partners in their profit and loss ratio because the changes in
asset values are the result of risk assumed by the partnership. Also, because it may be difficult to
separate gains and losses that result from liquidation from the under- or over-statement in book values
that result from accounting policies followed in prior years.
2. The final cash distribution is based on capital balances, not on profit and loss ratios, since the capital
balance represents the partners' "residual claims" to the assets remaining after settlement of partnership
obligations.
3. Because the UPA order of payment ranks partnership obligations to a partner ahead of asset
distributions to a partner for capital investments, a debit balance in a partner's capital account will create
problems when that partner has an outstanding loan balance. Other partners will have a claim against
this partner for the amount of his/her debit balance which is considered to be an asset of the partnership
by the UPA. If the partner with a debit balance settles his/her obligation with the partnership, there is no
problem. However, if he/she can't settle, the other partners must absorb the deficit as a loss, even though
the partner with the debit balance had received cash for his/her outstanding loan balance. To avoid this
inequity, the courts have recognized the right of the partnership to offset the loan balance against the
debit capital balance.
4. Maintaining separate accounts for outstanding loan and capital accounts recognizes the legal distinction
between the two. This would be important if the liquidation is carried on over an extended period, since
the UPA provides that a partner is entitled to accrued interest on the loan balance.
5. When the equity interest of one partner is inadequate to absorb realization losses several alternative
outcomes are possible. If the partner is personally solvent, he may pay the partnership for the amount he
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16-22 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
is liable. If he/she is personally insolvent then the other partners must absorb his/her debit balance in
their respective profit and loss ratio. If the other partners are unsure of what the partner with the debit
balance will do, but still wish to distribute cash, they can assume the worst (absorbing their share of the
debit balance) to determine what amount of cash can be safely distributed.
6. Cash should not be distributed to any partner until all liquidation losses are recognized in the accounts
or are provided for in determining a safe cash payment.
7. The classification of assets into personal and partnership categories in recognition of the rights of both
partnership creditors and creditors of the individual partners is referred to as "marshalling of assets."
8. To the extent that personal creditors do not recover from personal assets they can seek recovery from
those partnerships assets still available after partnership obligations have been met. This recovery,
however, is limited to the extent that the partner involved has a credit interest in partnership assets.
9. Because in an installment liquidation the amount of cash to be received from the unsold assets
and the resulting gain or loss is unknown, the partners should view each cash distribution as if it
were the final distribution.
10. The three assumptions upon which a safe cash distribution is determined are (1) any loan balances to
partners are offset against their capital accounts, (2) the remaining noncash assets will not generate any
more cash, and (3) any partner with a deficit capital balance will not settle his/her obligation to the
partnership. In other words, assume the worst.
The safe cash balance is computed as the difference between the current capital balances and the balance
required to maintain the above assumptions.
11. Unexpected costs are added to the book value of noncash assets. When the potential loss on the noncash
assets is allocated in the determination of a safe payment, these costs are also included.
12. The objective of the procedure is to bring the balance of the partners' capital accounts into the agreed
profit and loss ratio as soon as possible so that no one partner is placed in a better position than any
other partner.
13. The "loss absorption potential" is determined by dividing the partners' net capital balances by their
respective profit ratio. This determines the maximum amount of loss each partner can absorb.
14. The Uniform Partnership Act provides that the liabilities of the partnership shall rank in order of
payment as follows:
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1) Partnership laws grant each partner the right to information about the firms business. This allows
each partner to monitor the firms activities. Given the circumstances of the case, it would be your
duty to inspect any questionable transaction. Furthermore, you should ask the partner to explain the
reason for increasing the cost by $10,000. This would give you the opportunity to raise the concern
regarding the presence of the previously undetected rock. If the additional charge is not based on
fact, the cost should be removed.
2) In the present scenario, it appears that the partner might be experiencing personal financial
pressures. However, the firms reputation and future implications of the action must be considered
for the benefit of the partnership. Your loyalty to your partner does not alter these responsibilities.
You may wish to find other, more constructive ways to offer assistance to your partner in meeting
his personal obligations, and surviving what may be a difficult time in his life. However, ignoring
the situation is dishonest to the client and is likely to result in more serious long-term consequences.
Reference: http://www.lrc.ky.gov/KRS/362-01/403.PDF
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