Please Help Me.

INTRODUCTION working here for the past 40 years. I make around $45,000 a year in tips and salary and need to start planning for my future. Mr. Davis is the pharmacist and owner of this drug You recently graduated magna cum laude with a degree in store, and he operates this business as a sole proprietorship. accounting, and both your family and alma mater are proud His son, Junior Davis, is ready to take over. Junior is a good of you. You have been hired at the accounting firm Massey, Hall and Associates CPA, a prestigious accounting firm with boy, but he does not know much about business. He also just received his pharmacy degree and license. I trust Mr. Davis a national reputation. After training, you were assigned will never make a mistake dispensing prescriptions, but I am your first audit. The client is located in a small town in the not so sure about Junior. When he worked here as a boy he southern United States. The town was a major river port would come behind the counter during the day and make established before the Civil War but has now devolved into a himself super ice cream sundaes without paying. He is also sleepy, rural town resembling the TV town of Mayberry not as careful as Mr. Davis There are two places open for lunch: the lunch counter at "Mr. Davis has offered to sell the business to the three Davis's Drug Store and a hot dog eatery called Ray's Quick Lunch. You select the lunch counter at Davis's Drug Store of his employees before he retires: Junior, Mary Jones, and me. We would run the business as a partnership with the You watch in awe as the single food service employee behind three of us as general partners. Each of us would have an the counter efficiently prepares each meal and serves each equal say in the running of the business. We would continue to operate the three departments under the new partnership customer quickly. You notice that, without calling ahead, some sandwiches are prepared and placed on the table arrangement. I, of course, would keep the lunch counter, seconds before a regular customer enters and sits down. Mary would run the sundries, and Junior would run the At the beginning of the second week on the audit, you sit pharmacy. Each of us would run our own department without down at the lunch counter and prepare to order. As you sit any help from the other partners. By becoming partners, we can share the profits and participate in the management of down, the lunch counter employee sits down with you and introduces herself as Nancy Wilson. She also asks you for the business after Mr. Davis retires." your expert accounting advice. She explains, "I have been Table 1 Income Statement ($ in thousands) SUNDRIES ACCOUNT PHARMACY LUNCH COUNTER TAL $620,000 $1,472,000 Sales $600,000 $252,000 Cost of Goods Sold 375.000 400,000 75,000 850,000 622.000 Gross Profit 225,000 220,000 177,000 Direct Operating Expenses 270,000 110,000 100,000 60,000 Salaries 100,000 40,000 30,000 170,000 Allocated Common Expenses 30,000 30.000 30.000 90,000 S 92,000 _$ 50,000 Net Income $(15,000) $56,0000 Represents owner's withdrawals miscellancous expenses reserves $3,000. The miscellaneous "Here is the income statement for last year (see Table expenses consist mostly of property and real estate taxes 1). The salary for the pharmacist is actually Mr. Davis's withdrawals. Under the new arrangement, Junior would be "Based on my observations of the business, I think that able to withdraw the same amount. The other two salaries splitting the common costs evenly is unfair to Mary and me. For example, malpractice insurance costs $60,000, of are Mary's and mine. If we become partners, our salaries would become the compensation allowances shown here which $58,000 is for the pharmacy. The $2,000 left over in the first part of the proposed formula to allocate the for insurance for the sundries and lunch counter should be evenly split. Advertising costs about $25,000 per year. The partnership income (see Appendix A). My buy-in price is pharmacy and lunch counter do not benefit from advertising $50,000. I don't know anything about accounting and need your advice so the sundries department should receive the whole amount. Utilities cost about $2,000 per year. (The lunch "I have four concerns. First, what risks and benefits do I get by being a partner? Junior does not know much counter uses $1,000 of that and the other two departments about running a business, and Mary and I have only a little receive $500 each.) The remaining $3,000 in common costs management experience: we only run our own departments are for taxes and similar expcnscs. The pharmacy should get $1,500, and the sundries department and the lunch counter We don't know about running the entire business. What are my problems with assuming a managerial role here at the should split evenly the remainder ($750 each). That is how drug store? I think the common costs should be allocated, and I would like to suggest it to the others as an alternative proposal "Second, as an employee, there is little risk for me as a server; no one is ever unhappy with the foods I prepare and I have been doing this for 40 years without incident Before I do that, though, I need to know the effects it would have on each partner "Can you answer my questions?" No onc would cver suc the lunch counter or the sundries department for malpractice. But there is a large risk if Junior After going back to work, you tell the story to your boss, the fills a prescription wrong and hurts a customer. The store supervising accountant. She explains that Nancy's eldest son is has to pay a large malpractice insurance premium to cover a partner with the investment banking firm Silverman & Co., that contingency. What business risks am I assuming by a large client of your accounting firm with whom it wishes to becoming a partner? "Third, the proposed formula for allocating partnership maintain good relations. Therefore, performing some pro bono work for Nancy fits into the firm's plan for increasing business and building a strong relationship with the investment bank. Your boss advises you to answer Nancy's questions, pointing out that this is the type of assignment that the partners recognize, income is complicated (sec Appendix A). Is the formula fair to Mary and me? If the income stays the same as last ycar, how much will I make as a partner as opposed to being an which can facilitate a promotion. Yet she suggests you do the employee? work outside your normal business hours "Finally, the $90,000 in common costs are mostly for the pharmacy. There are basically four areas that make up the common costs: malpractice insurance that costs $60,000 The section of the partnership agreement covering allocation of partnership income and losses shown in Appendix A, and last ycar's income statement is included in Table 1. per ycar; advertising costs $25,000; utilitics cost $2,000; and ABOUT IMA With a worldwide network of more than 65,000 professionals, IMA (Institute of Management Accountants) is the world's leading organization dedicated to empowering accounting and finance professionals to drive business performance. IMA provides a dynamic forum for professionals to advance FIRST SET OF REQUIREMENTS: In a memo to Nancy Wilson, answer the issues she raised. Specifically: their careers through CMA (Certified Management 1. Describe the business risks and benefits associated Accountant) certification, research, professional education, with being a partner. This should include business risks networking, and advocacy of the highest ethical and professional standards. For more information about IMA, please visit www.imanet.org. unique to this venture Calculate each partner's share of last year's income, 2. assuming that the proposed allocation of partnership income from Appendix A had been in place Is the proposal worthy of Nancy's consideration? Do 3. you think that she should invest in the partnership? Use the calculations from Requirement 2, and support your decision with both the potential income she might earm and the increased risks and benefits from your answer co Requirement 1 ADDITIONAL REQUIREMENTS: Revise the memo from above, and address the following requirements Calculate each partner's share of last year's income, assuming, that Nancy's altemativeproposal had been in place 9. 10. If the other parties agree to Nancy's alternative, what would be her return on investment? In this calculation, should she use the total income allocated to her, or should she only use the incremental change in her income (the difference between her earmings calculated in Requirement 1 and her current salary of $30,000)? 11. Should Nancy agree to invest in the partnership if the other parties agree with her altemative proposal? Allocation of Partnership Income An allowance of S100,000 will be sllocated to Junior Davis, $40,000 to Mary Jones, and $30,000 to Nancy Wilson b Each partner will get 20 % of the income or loss for his or her department without consideration of the allocation from part "a. The formula for each department is ((gross profit-the sum of direct operating expenses+ allocated common expenses) x 20%). All remaining profits or losses wll be allocated to the partners evenly. C. INTRODUCTION working here for the past 40 years. I make around $45,000 a year in tips and salary and need to start planning for my future. Mr. Davis is the pharmacist and owner of this drug You recently graduated magna cum laude with a degree in store, and he operates this business as a sole proprietorship. accounting, and both your family and alma mater are proud His son, Junior Davis, is ready to take over. Junior is a good of you. You have been hired at the accounting firm Massey, Hall and Associates CPA, a prestigious accounting firm with boy, but he does not know much about business. He also just received his pharmacy degree and license. I trust Mr. Davis a national reputation. After training, you were assigned will never make a mistake dispensing prescriptions, but I am your first audit. The client is located in a small town in the not so sure about Junior. When he worked here as a boy he southern United States. The town was a major river port would come behind the counter during the day and make established before the Civil War but has now devolved into a himself super ice cream sundaes without paying. He is also sleepy, rural town resembling the TV town of Mayberry not as careful as Mr. Davis There are two places open for lunch: the lunch counter at "Mr. Davis has offered to sell the business to the three Davis's Drug Store and a hot dog eatery called Ray's Quick Lunch. You select the lunch counter at Davis's Drug Store of his employees before he retires: Junior, Mary Jones, and me. We would run the business as a partnership with the You watch in awe as the single food service employee behind three of us as general partners. Each of us would have an the counter efficiently prepares each meal and serves each equal say in the running of the business. We would continue to operate the three departments under the new partnership customer quickly. You notice that, without calling ahead, some sandwiches are prepared and placed on the table arrangement. I, of course, would keep the lunch counter, seconds before a regular customer enters and sits down. Mary would run the sundries, and Junior would run the At the beginning of the second week on the audit, you sit pharmacy. Each of us would run our own department without down at the lunch counter and prepare to order. As you sit any help from the other partners. By becoming partners, we can share the profits and participate in the management of down, the lunch counter employee sits down with you and introduces herself as Nancy Wilson. She also asks you for the business after Mr. Davis retires." your expert accounting advice. She explains, "I have been Table 1 Income Statement ($ in thousands) SUNDRIES ACCOUNT PHARMACY LUNCH COUNTER TAL $620,000 $1,472,000 Sales $600,000 $252,000 Cost of Goods Sold 375.000 400,000 75,000 850,000 622.000 Gross Profit 225,000 220,000 177,000 Direct Operating Expenses 270,000 110,000 100,000 60,000 Salaries 100,000 40,000 30,000 170,000 Allocated Common Expenses 30,000 30.000 30.000 90,000 S 92,000 _$ 50,000 Net Income $(15,000) $56,0000 Represents owner's withdrawals miscellancous expenses reserves $3,000. The miscellaneous "Here is the income statement for last year (see Table expenses consist mostly of property and real estate taxes 1). The salary for the pharmacist is actually Mr. Davis's withdrawals. Under the new arrangement, Junior would be "Based on my observations of the business, I think that able to withdraw the same amount. The other two salaries splitting the common costs evenly is unfair to Mary and me. For example, malpractice insurance costs $60,000, of are Mary's and mine. If we become partners, our salaries would become the compensation allowances shown here which $58,000 is for the pharmacy. The $2,000 left over in the first part of the proposed formula to allocate the for insurance for the sundries and lunch counter should be evenly split. Advertising costs about $25,000 per year. The partnership income (see Appendix A). My buy-in price is pharmacy and lunch counter do not benefit from advertising $50,000. I don't know anything about accounting and need your advice so the sundries department should receive the whole amount. Utilities cost about $2,000 per year. (The lunch "I have four concerns. First, what risks and benefits do I get by being a partner? Junior does not know much counter uses $1,000 of that and the other two departments about running a business, and Mary and I have only a little receive $500 each.) The remaining $3,000 in common costs management experience: we only run our own departments are for taxes and similar expcnscs. The pharmacy should get $1,500, and the sundries department and the lunch counter We don't know about running the entire business. What are my problems with assuming a managerial role here at the should split evenly the remainder ($750 each). That is how drug store? I think the common costs should be allocated, and I would like to suggest it to the others as an alternative proposal "Second, as an employee, there is little risk for me as a server; no one is ever unhappy with the foods I prepare and I have been doing this for 40 years without incident Before I do that, though, I need to know the effects it would have on each partner "Can you answer my questions?" No onc would cver suc the lunch counter or the sundries department for malpractice. But there is a large risk if Junior After going back to work, you tell the story to your boss, the fills a prescription wrong and hurts a customer. The store supervising accountant. She explains that Nancy's eldest son is has to pay a large malpractice insurance premium to cover a partner with the investment banking firm Silverman & Co., that contingency. What business risks am I assuming by a large client of your accounting firm with whom it wishes to becoming a partner? "Third, the proposed formula for allocating partnership maintain good relations. Therefore, performing some pro bono work for Nancy fits into the firm's plan for increasing business and building a strong relationship with the investment bank. Your boss advises you to answer Nancy's questions, pointing out that this is the type of assignment that the partners recognize, income is complicated (sec Appendix A). Is the formula fair to Mary and me? If the income stays the same as last ycar, how much will I make as a partner as opposed to being an which can facilitate a promotion. Yet she suggests you do the employee? work outside your normal business hours "Finally, the $90,000 in common costs are mostly for the pharmacy. There are basically four areas that make up the common costs: malpractice insurance that costs $60,000 The section of the partnership agreement covering allocation of partnership income and losses shown in Appendix A, and last ycar's income statement is included in Table 1. per ycar; advertising costs $25,000; utilitics cost $2,000; and ABOUT IMA With a worldwide network of more than 65,000 professionals, IMA (Institute of Management Accountants) is the world's leading organization dedicated to empowering accounting and finance professionals to drive business performance. IMA provides a dynamic forum for professionals to advance FIRST SET OF REQUIREMENTS: In a memo to Nancy Wilson, answer the issues she raised. Specifically: their careers through CMA (Certified Management 1. Describe the business risks and benefits associated Accountant) certification, research, professional education, with being a partner. This should include business risks networking, and advocacy of the highest ethical and professional standards. For more information about IMA, please visit www.imanet.org. unique to this venture Calculate each partner's share of last year's income, 2. assuming that the proposed allocation of partnership income from Appendix A had been in place Is the proposal worthy of Nancy's consideration? Do 3. you think that she should invest in the partnership? Use the calculations from Requirement 2, and support your decision with both the potential income she might earm and the increased risks and benefits from your answer co Requirement 1 ADDITIONAL REQUIREMENTS: Revise the memo from above, and address the following requirements Calculate each partner's share of last year's income, assuming, that Nancy's altemativeproposal had been in place 9. 10. If the other parties agree to Nancy's alternative, what would be her return on investment? In this calculation, should she use the total income allocated to her, or should she only use the incremental change in her income (the difference between her earmings calculated in Requirement 1 and her current salary of $30,000)? 11. Should Nancy agree to invest in the partnership if the other parties agree with her altemative proposal? Allocation of Partnership Income An allowance of S100,000 will be sllocated to Junior Davis, $40,000 to Mary Jones, and $30,000 to Nancy Wilson b Each partner will get 20 % of the income or loss for his or her department without consideration of the allocation from part "a. The formula for each department is ((gross profit-the sum of direct operating expenses+ allocated common expenses) x 20%). All remaining profits or losses wll be allocated to the partners evenly. C