On August 12 1996, three people, who had previously been employed to wait on tables in one of the cafes in Baxter (Oregon), formed a partnership.The eldest of the three was Mrs. Bevan, a middle-aged widow.The other two were Mr. and Mrs. Elmer Maywood.The partnership lasted for slightly more than four months, and in connection with its dissolution the preparation of a balance sheet became necessary.

Each of the partners contributed $2,000 cash, a total of $6,000. On August 12, the partnership purchased the Smoky Valley Caf for $16,000.The purchase price included land valued at $2,500, improvements to land at $2,000, buildings at $10,500, and caf equipment at $1,000.The partnership made a down payment of $4,500 (from its $6,000 cash) and signed a mortgage for the balance of the $16,000.The doors of the caf were opened for business shortly after August 12.

A factor that made this particular piece of properly attractive to them was the fact that the building contained suitable living accommodations. One of its rooms was occupied by Mrs. Bevan, another by the Maywoods.

The Maywoods and Mrs. Bevan agreed on a division of duties and responsibilities which would allow them to keep the caf open twenty four hours a day. They agreed that Mrs. Bevan would operate the kitchen, Mrs. Maywood would have charge of the dining room, and Mr. Maywood would tend the bar.Mrs. Bevan agreed to keep the accounting records. She was willing to perform this task because she was vitally interested in making the business a success.She had invested the proceeds from the sale of her modest home and from her husband's insurance policy in the venture.If it failed, a major part of her financial resources would be lost.

A beer license was granted by the state authorities.On August 15, the partnership sent a cheque for $35 to the distributor who supplied beer. This $35 constituted a deposit on bottles and kegs necessary for the operation of the bar and would be returned to the Smoky Valley Caf after all bottles and kegs had been returned to the beer distributor.

The Smoky Valley Caf was located on a major highway, and a great deal of business was obtained from truck drivers.One of these truck driver patrons, Fred Mead, became a frequent customer.He soon gained the friendship of Mrs. Maywood.

In October, the partners decided that to continue to offer their patrons quality food, they would have to add to their equipment. This new equipment cost $415.95, and because the supplier of the equipment was unimpressed with the firm's credit rating, the equipment was paid for in cash.

The month of November did not improve the cash position of the business.In fact, the cash balance became so low that Mrs. Bevan contributed additional cash in the amount of $400.00 to the business.She had hopes, however, that the future would prove to be more profitable.

On the night of December 12, Fred Mead stopped in the cafe to see Mrs. Maywood.Shortly after he left, Mrs. Maywood retired to her room.A few hours later, Mr. Maywood came in and asked for her, and after a brief search discovered that she had departed through a window.Her absence led him to the conclusion that she had departed with Fred Mead, and he thereupon set out in pursuit of the pair.

On December 16, Mrs. Bevan decided that the partnership was dissolved because she had not heard any word from either of the Maywoods.(The courts subsequently affirmed that the partnership was dissolved as of December 16, 1996.)Although she had no intention of ceasing operations, she realised that an accounting would have to be made as of December 16.She called in Mr. Bailey, a local accountant, for this purpose.

Mrs. Bevan told Mr. Bailey that they had been able to pay $700 on the mortgage while the partnership was operating.Cash on hand amounted to $65.35, but the bank balance was only $9.78.Mr. Bailey found bills owed by the caf totalling $92.01.Mrs. Bevan said that her best estimate was that there was $100 worth of food on hand.

Mr. Bailey estimated that a reasonable allowance for depreciation on the fixed assets was as follows:

AssetDepreciation Allowance

Land improvements$44.45

Buildings 233.45

Caf equipment 44.19

1 Author: S K Bhattacharyya & John Dearnden

Required

Executive Summary:The case is basically about a failed partnership between three people. One of the partners runs away and this is the cause of the failure of the partnership. The effect of the failure is that the partnership has to be dissolved and an external valuator is called in to assess the business worth as on the day of the valuation. The objective of the study is to:

• find the balance sheet value of the company as on the day of formation
• find the balance sheet value of the company as on the day of liquidation
• find the equity stakes of the partners as on the day of liquidation
• find if the partners received these amounts

1:Draw up a balance sheet for Smoky Valley Caf as of August 12, 1996, taking into account the events described in this case.

2:Draw up a balance sheet as of December 16, 1996.

3:What was the equity stake of the Maywoods and Mrs. Bevan, respectively?(In partnership law, the partners share equally in profits and losses unless there is a specific provision to the contrary. Each partner in the Smoky Valley Caf, therefore, would have equity in one third of the profits, or his/her equity would be decreased by one third of the losses.)

4:Do you suppose that the partners received these amounts?Why or why not?

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