Partners Green and Blue have operated a coin laundry business in a strip shopping center for several years. Their income-sharing ratio is 3:2. The business was generating decent operating cash flow but in the last 18 months, cash flow declined precipitously. On alternate days each partner empties the coins from the laundromat's machines and deposits them in the bank.
Green is experiencing personal financial problems relating to a messy divorce and investments that went "in the tank." She is urging Blue to sell out and liquidate their partnership. The following trial balance is prepared by the partners' accountant.
Cash$2,300
Supplies and prepayments900
Equipment42,000
Accumulated depreciation(17,000)
Accounts payable(1,350)
Loan payable-Blue(11,000)
Sales(25,000)
Operating expenses13,000
Depreciation expense6,000
Capital-Green(5,000)
Capital-Blue(4,850)
Totals$ 0
In addition, the partnership has a noncancellable lease (remaining term: 2 years) on the building where the laundromat is located, classified as an operating lease under ASC Topic 840. The monthly payments of $500 are based on an implicit annual interest rate of 9 percent and are consistently made on time. Although the lessor would like to rent the space to a pizza shop which would bring more traffic to the strip shopping center, he stands behind the lease agreement that requires a $10,000 payment to release the lessees.
Required
a. Identify the weakness in the partnership's internal control which could produce the pattern of declining cash flow.
b. If the partners decide to liquidate, explain whether they should pay the $10,000 or the present value of the remaining lease payments.
c. Using the cash distribution plan methodology, explain whether it is in Green's interest to liquidate at this time.