B&T Auto Parts Store. See attached file for full problem description.
1. Why is the lack of a partnership agreement causing such problems for Terry and Bob?
2. Discuss the validity of the two positions:
a) 50-50 sharing
b) 1/3-2/3 sharing
and the factors that help decide which is the correct position.
3. There was a change in the profit sharing effected in 1986. What is the position of the accountant in making this change? Is he partly responsible for the lawsuit?
4. How should 1987 profits be shared?
5. What management problems do you envision form Terry's exit and the new manager, Bob, who had no previous experience at running an auto parts store?
6. What are the appropriate financial records to keep in this business?
7. What kinds of financial controls are needed in the business?
(1) Partnership agreement explicitly states how the interest in the company and profits are shared. Here, as we could see, there were different situations when the share ratio was 2:1 as well as 1:1, consequently making it difficult to decide what the ultimate share they should use for splitting the company sales proceeds is.
(a) 50:50 sharing: Such factors as drawing of money for personal expenses, computer-generated financial statements showing equal interest in capital contribute to considering them as equal partners. Also, in the beginning Terry was completely responsible for the part store whereas Bob was solely responsible for his garage.
(b) 1/3:2/3 sharing: ...
The solution discusses and analyzes the partnership situation for B&T Auto Parts Store.