On July 12, 2021 three people who had previously been employed to wait on tables in one

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Question:

On July 12, 2021 three people who had previously been employed to wait on tables in one of the cafes in Nairobi formed a partnership. The eldest of the three was Carolyne, a middle-aged widow. The other two were Mr and Mrs Damiana. The partnership lasted for slightly more than four months, and in connection with its dissolution, it became necessary to prepare a statement of financial position. Each of the partners contributed Ksh.2000,000 cash. On July 12, the partnership purchased the Kabianda restaurant for Ksh16,000,000. The purchase price included land valued at Ksh.2,500,000, land improvements at Ksh.2,000,000, buildings at Ksh.10,500,000, and restaurant equipment at Ksh.1,000,000. The partnership made a down payment of Ksh.4,500,000 (from its Ksh.6,000,000 cash) and signed a mortgage for the balance of the Ksh.16,000,000. The doors of the restaurant were opened for business shortly after July 12. One of the things that made this particular piece of property attractive to them was the fact that the building contained suitable living accommodations. One of these rooms was occupied by Carolyne, another by the Damianas. The Damianas and Carolyne agreed on a division of duties and responsibilities, which would allow them to keep the restaurant, open twenty-four hours a day. They agreed that Carolyne would operate the kitchen, Mrs. Damiana would be in charge of the dining room, and that Mr. Damiana would attend to the juice parlour. Carolyne agreed to keep the accounting records. She was willing to perform this task because she was vitally interested in making the business a success. She had invested the proceeds from the sale of her modest home and from her husband's insurance policy in the venture. If it failed, the major part of her financial resources would be lost. On July 15, the partnership sent a cheque for Ksh.35,000 to the distributor who supplied drinks. This Ksh.35,000 constituted a deposit on bottles and crates necessary for the operation of the juice parlour and would be returned to the Kabianda Restaurant once all bottles and crates had been returned to the juice distributor. The Kabianda Restaurant was located on a major highway, and a great deal of business was obtained from truck drivers. One of these truck driver patrons, Fred, became a frequent customer. He soon gained the friendship of Mrs. Damiana. In September, the partners decided that to continue to offer their patrons quality food, they would have to increase their equipment. This new equipment cost Ksh.415,950 and because the supplier of the equipment was unimpressed with the firm's credit rating, the equipment was paid in cash. In the month of October, the cash position of the restaurant did not improve. In fact, the cash balance became so low that Carolyne contributed additional cash in the amount of Ksh.400,000 to the business. She had hopes, however, that the future would prove to be more profitable. On the night of November 12, Mrs. Damiana passed away.

On November 16, Carolyne and Mr. Damiana decided that the partnership should be dissolved. Although she had no intention of ceasing operations, Carolyne and Mr. Damiana realized that an accounting of the business would have to be made as of 16 November. Both knowing that you are pursuing a financial accounting course under you MBA programme, they approached you for this purpose.

Carolyne advised that they had been able to pay Ksh.700,000 on the mortgage while the partnership was operating.

Cash on hand amounted to Ksh.65,350 but the bank balance was only Ksh.9,780.

You found bills owed by the restaurant totalling Ksh.92,010. Carolyne said that her best estimate was that there was Ksh.100,000 worth of food on hand. You estimated that a reasonable allowance for depreciation on the non-current assets was as follows:

Asset Depreciation Allowance Ksh. Land improvements 44,450

Buildings 233,450

Restaurant 44,190

Required:

(a) Draw up a Statement of financial position for the Kabianda restaurant as at July 12, 2021 taking into account the events described in the first two paragraphs of the case.

(b) Draw up a Statement of financial position for the Kabianda restaurant as of November 16, 2021.

(c) What were the equities of the Damianas and Carolyne as at November 16, 2021, respectively? (In partnership law, the partners share equally in profits and losses unless there is a specific provision to the contrary. Each partner in the Kabianda restaurant, therefore, would have an equity in one third of the profits, or his equity would be decreased by one-third of the losses)

(d) Did the partners recover the amounts invested in the business? Why?