Question
TECUMSEH CAFE1 On March 31, 1973, the partnership that had been organized to operate the Tecumseh Caf was dissolved under unusual circumstances, and in connection
TECUMSEH CAFE1
On March 31, 1973, the partnership that had been organized to operate the Tecumseh Caf was dissolved under unusual circumstances, and in connection with its dissolution, the preparation of a balance sheet became necessary. The partnership was formed by Mr. and Mrs. Frank Rayburn and Mrs. Grace Harris, who had become acquainted while working in a Portland Oregon restaurant. On Nov 1, 1972, each of the three partners contributed $5,000 cash to the partnership. The Rayburns' contribution represented practically all of their savings. Mrs. Harris' payment was the proceeds of her late husband's insurance policy. On that day, the partnership signed a one-year lease to the Tecumseh Cafe, located in the nearby recreational area. The monthly rent on the cafe was $600 and paid in cash. They were attracted to this facility in part because there were living accommodations on the floor above the restaurant. One room was occupied by the Rayburns and another by Mrs. Harris. They borrowed $6,000 from a local bank and used this plus $12,000 of partnership funds to buy out the previous operator of the caf. Of this amount, $17,000 was for equipment, and $1,000 was for goods and beverages then on hand. The partnership paid $240 for local operating licenses, good for one year beginning November 1, and paid $500 for a new cash register. The remainder of the $21,000 was deposited in a checking account. The partners opened the restaurant shortly after November 1. Mr. Rayburn was the cook, and Mrs. Rayburn and Mrs. Harris waited on customers. Mrs. Rayburn also ordered the food, beverages, and supplies, operated the cash register, and was responsible for the checking account. The restaurant operated throughout the winter season of 1972-73. It was not very successful. On the morning of March 31, 1973, Mrs. Rayburn discovered that Mr. Rayburn and Mrs. Harris had disappeared. Mrs. Harris had taken all her possessions, but Mr. Rayburn had left behind most of his clothing, presumably because he could not remove it without warning Mrs. Rayburn. The new cash register and its contents were also missing. Mrs. Rayburn concluded that the partnership was dissolved. (The court subsequently affirmed that the partnership was dissolved as of March 30.) Mrs. Rayburn decided to continue the operations of the Tecumseh Caf. She realized that an accounting would have to be made as of March 30, and called in Frank Whittaker, an acquaintance who was knowledgeable about accounting. In response to Mr. Whittaker's questions, Mrs. Rayburn said that the cash register had contained $110 and that the checking account balance was $368. Ski instructors who were permitted to charge their meals had run-up accounts totaling $353 (These accounts subsequently were paid in full.) Tecumseh Caf owed suppliers an amount totaling $476. Mr. Whittaker estimated that depreciation on assets amounted to $800. Food and beverages on hand were estimated to be worth $800. During the period of its operation, the partners drew at agreed-upon amounts, and these payments were up to date. The clothing that Mr. Rayburn left behind was estimated to be worth $300. The partnership had also repaid $500 of the bank loan. Mr. Whittaker explained that in order to account for the partners' equity, he would prepare a balance sheet. He would list the items that the partnership owed as of March 30, subtract the amounts that it owed to outside parties, and the balance would be the equity of the three partners. Each partner would be entitled to one-third of this amount.
QUESTIONS 1. Prepare a balance sheet for the Tecumseh Cafe as of November 2, 1972. 2. Prepare a balance sheet as of March 30, 1973. 3. Disregarding the material complications, do you suppose that the partners received the equity determined in Question 2? Why?
NOTE: In answering Questions 1-3, do not use the information presented below.
In addition to preparing the balance sheets described in Questions 1 and 2 above, Mr. Whittaker, the accountant, agreed to prepare an income statement. He said that such a financial statement would show Mrs. Rayburn how profitable operations had been, and thus help her to judge whether it was worthwhile to continue operating the restaurant. In addition to the information given in the case, Mr. Whittaker learned the cash received from customers through March 30 amounted to $13,139 and the cash payments were as follows:
Monthly payments to partners . . . . . . . . $6,300 Wages to part-time employees . . . . . . . . 1,315 Interest . . . . . . . . . . . . . . . . . . 150 Food and beverage supplies . . . . . . . . . 2,615 Telephone and electricity . . . . . . . . . 863 Miscellaneous. . . . . . . . . . . . . . . . 178 Rent payments. . . . . . . . . . . . . . . . 3,000
QUESTIONS (continued) 4. Prepare an income statement. 5. What does this income statement tell Mrs. Rayburn? 6. Prepare a Statement of Cash Flows.
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