Partners Pat and Stacy have a coin-operated laundry business in a retail shopping center, PS-2 Laundry. The business has operated for several years with the partners sharing income equally. They employ two part-time workers to assist with routine operations. The part-time employees work alternating shifts and are only there if either Pat or Stacy is present. The laundry business is primarily a cash business. On alternate days each partner empties the coins from the laundromats machines and deposits the money in the bank. The business was generating a healthy cash flow for several years. However, in the last 18 months, cash flow declined precipitously. Stacy believes that the decline in cash is a result of collusion between the two part-time workers. Stacy assumes that the workers are somehow rigging the machines and requiring the customers to pay them directly. When Stacy shares these concerns with Pat, Pat assures Stacy that the part-time workers are not stealing money. Pat has been pocketing cash because of some personal financial problems related to a messy divorce and several failed investments. Pat is urging Stacy to sell out and liquidate their partnership. Pat believes that upon liquidation there will be enough cash to overcome the personal financial crisis and repay the cash that has been taken from the business. Stacy is not aware of Pats financial problems.

The following trial balance is prepared by the partners accountant. Dr (Cr) Cash $37,800 Supplies and prepayments 2,500 Equipment 62,000 Accumulated depreciation (33,583) Accounts payable (4,950) Loan payableStacy (22,000) Sales (23,620) Operating expenses 18,700 Depreciation expense 2,583 CapitalPat (14,680) CapitalStacy (24,750) Totals $0

In addition, the partnership has a contractual lease on the building where the laundromat is located. The lease expires five years from now. The monthly payments of $500 are consistently made on time and recorded as part of operating expense. If the lease is terminated early, the lessor requires a $2,000 payment for early lease termination.

Required: 1. Identify the weakness in the partnerships internal control which could produce the pattern of declining cash flows. How (what actions) could the partnership correct the internal control weakness? Explain. 2. Do you think fraud has occurred? Or an ethical breach? Explain. 3. What are the various ways of resolving the ethical issues? What actions can be implemented, stopped, revised, etc.? There must be at least two distinct recommendations (more than 2 is fine). Discuss each. 4. Which one of the recommendations is the best resolution for the ethical issues or internal control weaknesses? Why? Explain. 5. Using Excel: Determine the ending capital balances and prepare a cash distribution plan for the liquidation. An excel file must be submitted. 6. Show the calculations in the cell(s). An excel file must be submitted. 7. How much must be realized on the sale of the non-cash assets before Pat receives any of the liquidation proceeds? Do you think it is likely that Pat will receive any proceeds? Do you think Pat will be able to repay the cash that has been taken? Consider the best- and worst-case scenarios. Explain.