Case 2-3 Lone Pine Cafe (A) - Copy.doc

Case 2-3 Lone Pine Café (A) On March 31, 2009, the partnership that had been organized to operate the Lone Pine Café was dissolved under unusual circumstances, and in connection with its dissolution, preparation of a balance sheet became necessary. The partnership was formed by Mr. and Mrs. Henry Antoine and Mrs. Sandra Landers, who had become acquainted while working in a Portland, Oregon, restaurant. On November 1, 2005, each of the three partners contributed $16,000 cash to the partnership and agreed to share in the profits proportionally to their contributed capital (i.e., one-third each). The Antoines’ contribution represented practically all of their savings. Mrs. Landers’ payment was the proceeds of her late husband’s insurance policy. On that day also the partnership signed a one-year lease to the Lone Pine Café, located in a nearby recreational area. The monthly rent on the café was $1,500. This facility attracted the partners in part because there were living accommodations on the floor above the restaurant. One room was occupied by the Antoines and another by Mrs. Landers. The partners borrowed $21,000 from a local bank and used this plus $35,000 of partnership funds to buy out the previous operator of the café. Of this amount, $53,200 was for equipment and $2,800 was for the food and beverages then on hand. The partnership paid $1,428 for local operating licenses, good for one year beginning November 1, and paid $1,400 for a new cash register. The remainder of the $69,000 was deposited in a checking account. Shortly after November 1, the partners opened the restaurant. Mr. Antoine was the cook, and Mrs. Antoine and Mrs. Landers waited on customers. Mrs. Antoine 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 2009-2010. It was not very successful. On the morning of March 31, 2010, Mrs. Antoine discovered that Mr. Antoine and Mrs. Landers had disappeared. Mrs. Landers had taken all her possessions, but Mr. Antoine had left behind most of his clothing, presumably because he could not remove it without warning Mrs. Antoine. The new cash register and its contents were also missing. No other partnership assets were missing. Mrs. Antoine concluded that the partnership was dissolved. (The court subsequently affirmed that the partnership was dissolved as March 30.) Mrs. Antoine decided to continue operating the Lone Pine Café. She realized that an accounting would have to be made as of March and called in Donald Simpson, an acquaintance who was knowledgeable about accounting. In response to Mr. Simpson’s questions, Mrs. Antoine said that the cash register had contained $311 and that the checking account balance was $1,030. Ski instructors who were permitted to charge their meals had run up accounts totaling $870. (These accounts subsequently were paid in full.) The Lone Pine Café owed suppliers amounts totaling $1,583. Mr. Simpson estimated that depreciation on the assets amounted to $2,445. Food and beverages on hand were estimated to be worth $2,430. During the period of its operation, the partners drew salaries at agreed-upon amounts, and these payments were up to date. The clothing that Mr. Antoine left behind was estimated to be worth $750. The partnership also repaid $2,100 of the bank loan. Mr. Simpson explained that in order to account for partners’ equity, he would prepare a balance sheet. He would list the items 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 Lone Pine Café as of November 2, 2009. 2. Prepare a balance sheet as of March 30, 2010. 3. Disregarding the material complications, do you suppose that the partners would have been able to receive their proportional share of the equity determined in Question 2 if the partnership was dissolved on March 30, 2010? Why?