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Partnership Issues

Following is a sample writing (essay) question for the CPA exam. The answers are to be a paragraph each (in essay form) explaining your reasoning.

Best Aviation Associates is a general partnership engaged in the business of buying, selling, and servicing used airplanes. Best's original partners were Martin and Kent. They formed the partnership on January 1, 2007, under an oral agreement, which provided that the partners would share profits equally. There was no agreement as to how the partners would share losses. At the time the partnership was formed, Martin contributed $320,000 and Kent contributed $80,000.

On December 1, 2007, Best hired Baker to be a salesperson and to assist in purchasing used aircraft for Best's inventory. On December 15, 2007, Martin instructed Baker to negotiate the purchase of a used airplane form Jackson without disclosing that Baker was acting on Best's behalf. Martin thought that Baker could negotiate a better price if Jackson was not aware that the aircraft was being acquired for Best. The agreement provided that Jackson would deliver the airplane to baker on January 2, 2008. Jackson attempted to deliver the used airplane purchased for Best by Baker. Baker, acting on Martin's instructions, refused to accept delivery or pay for the purchase price.

On December 20, 2007, Kent assigned his partnership interest in Best to Green. On December 31, 2007, Kent advised Martin of the assignment to Green. On January 11, 2008, Green contacted Martin and demanded to inspect the partnership books and to participate on the management of partnership affairs, including voting on partnership decisions.

On January 13, 2008, it was determined that Best had incurred an operating loss of $160,000 in 2007. Martin demanded that Kent contribute $80,000 to the partnership to account for Kent's share of the loss, Kent refused to contribute.

On January 28, 2008, Laco Supplies, Inc., a creditor of Best, sued Best and Martin for unpaid bills totaling $92,000. Best had not paid the bills because of cash shortfall caused by the 2007 operating loss.
Jackson has taken the following position:

? Baker is responsible for any damages incurred by Jackson as a result of Best's refusal to accept delivery or pay for the purchase price.
Martin has taken the following positions:
? Green is not entitled to inspect the partnership books or participate in the management of the partnership.
? Only the partnership is liable for the amounts owed to Laco, or, in the alternative, Martin's personal liability is limited to 50 percent of the total of the unpaid bills.
Kent has taken the following positions:
? Only Martin is liable for the 2007 operating loss because of the assignment to Green of Kent's partnership interest.
? Any personal liability of the partners for the 2007 operating loss should be allocated between them on the basis of their original capital contributions

Required:

a. Determine whether Jackson's position is correct, and state the reasons for your conclusions.
b. Determine whether Martin's position is correct, and state the reasons for your conclusions.
c. Determine whether Kent's position is correct, and state the reasons for your conclusions.

Solution Preview

Required:
? Determine whether Jackson's position is correct, and state the reasons for your conclusions.
? Determine whether Martin's position is correct, and state the reasons for your conclusions.
? Determine whether Kent's position is correct, and state the reasons for your conclusions.

? Jackson's position is: Baker is responsible for any damages incurred by Jackson as a result of Best's refusal to accept delivery or pay for the purchase price. Jackson's position is correct. The delivery charges are Baker's as an agent, if an agency was formed, and therefore Best's responsibility. If there was consideration due to a signed contract given by Jackson Best is ...

Solution Summary

This solution examines partnership issues in the context of a CPA Exam sample question.

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