Modern Cardiology Group LLP is a privately owned medical partnership. Simon Nave, MD, and John Sophisticate, MD, the managing partner, have an income-sharing dispute while negotiating the renewal of Dr. Naves initial one-year agreement with the medical partnership. Dr. Nave, a recent board-certified cardiologist, is the newest of five partners in Modern Cardiology. The partners share profits and losses equally. Dr. Sophisticate gives Dr. Nave Exhibit 1, an income statement of Modern Cardiology, which shows that his one-fifth equal share of the $1,000,000 partnership income is $200,000. Dr. Nave argues that his $200,000 share of partnership income is inadequate given his four years of college, four years of medical school, five years of cardiology residency, and the fact that he is seeing at least one-fifth of the patients and generating at least one-fifth of the patient revenues. Although he does not question his one-fifth share of the partnerships profit, he questions what appears to him to be an unusually high rent expense72 percent of total revenues. Dr. Sophisticate counters that the rent reflects current market rentals for comparable equipment and facilities, that Modern Cardiologys profit is only $1,000,000, and that Dr. Nave receives his one-fifth equal share; until he generates substantially more patient revenues and the partnership becomes more profitable, an increase is out of the question.

EXHIBIT 1

Modern Cardiology Group, LLP

Income Statement

Patient revenues $5,000,000

Office and equipment rent expense $3,600,000

Technician, nurses, and staff salaries 300,000

Non-owner administrative salaries and miscellaneous 100,000

TOTAL 4,000,000

Net income loss $1,000,000

Dr. Naives share $200,000

As it turns out, Dr. Sophisticate and two other senior partners of Modern Cardiology own all the voting stock of Technology Properties, Inc. In turn, Technology Properties owns the building in which Modern Cardiology has its practice office and owns the medical equipment that Modern Cardiology uses to conduct various patient tests; it also owns a medical laboratory that operates in the building with the cardiology patients as the principal customers. However, Dr. Sophisticate does not wish to consider Technology Properties profits in the negotiations with the cardiology partners. He claims that the building and equipment are assets of a separate business entity that were purchased independently from the cardiology practice and financed by the investment of just the three senior partners, and therefore do not concern the other two cardiology partners. As indicated in Exhibit 2, Technology Properties income statement shows a $4,000,000 net income.

1. How useful is Modern Cardiologys income statement as presented in Exhibit 1 in resolving this income-sharing dispute?
2. What are its limitations?
3. Does it conform to U.S. generally accepted accounting principles (GAAP)? Cite the standards including paragraph numbers to support your answer.
4. What is the appropriate entity for assessing the reasonableness of Modern Cardiologys income distribution and profitability?
5. What is the appropriate entity for assessing the reasonableness of Technology Properties income distribution and profitability?

6. What advice would you provide the negotiating parties about considering Technology Properties income statement in their discussions?
7. Why might Dr. Sophisticate insist on only considering the income statement of Modern Cardiology?
8. What advice would you give Dr. Nave prior to renewing the partnership agreement?

9. What other pertinent information would you need to assess the reasonableness of the income distribution and profitability of the two companies?

10. From an ethical perspective, should the senior partners make Technology Properties income statement available to Dr. Nave now?

11. Should they have made it available prior to his admission into the partnership?