Otto Weissner and Philip Baaz have operated an import and sales partnership for fifteen years. They import a variety of food products into Germany and distribute them to small speciality grocery stores and some larger chain stores in southern Bavaria. At times, they have made profits of up to €150,000 per year (profits and losses are split evenly); however, a lingering recession has hurt their business and profits were only €80,000 last year. Philip Baaz, in his late fifties and financially secure, has decided to retire. Tired of life in the fast lane, he has moved to the French Riviera and left the partnership in Otto Weissner’s hands.

Otto is in his mid-forties, and through a series of personal tribulations, is nowhere near as financially secure as his partner. He does not have the resources to buy out Baaz personally, and there is no cash in the partnership at the moment. Assets consist of receivables and inventory. A significant downsizing would be required to buy out Baaz with a payment from the partnership right now. Baaz, however, is in no hurry for his money. The partners have agreed that for the rest of this year, Weissner will operate the business alone, and profits will be split evenly. At year end, Baaz will leave the partnership and take back a five-year note payable for the book value of the balance in his partnership account, which would include his share of current year profits. While Baaz would not have helped generate this year’s profits, this allocation was agreed to be fair due to his past contributions.

At the end of the year, you have arrived to prepare the financial statements for the year. You are a professional accountant. The partnership has been your client for 15 years (since the partnership was formed), and you are on excellent terms with the partners and their staff. You have met with the bookkeeper and obtained the following information:

1. Since Weissner and Baaz have personal contact with their customers, the partnership has always estimated the uncollectible portion of accounts receivable based on specific identification of problem accounts. This year, the allowance has been based on a percentage of sales — at a rate that is double the historical trend. The bookkeeper has assured you that most receivables are current, but “there’s a recession on and we expect some problems to crop up.”

2. During the year, a sizable amount of inventory acquired during the last two years was written off. The bookkeeper explained that the product was not perishable, that it was still in the warehouse but very slow moving, and that Weissner had given up trying to sell it.

3. A personal computer and laser printer were acquired for office use late in the year. Consistent with prior policy, a full year’s depreciation was booked in the year of acquisition. Previous office equipment has been depreciated using the straight-line method, but the computer is being depreciated on a 40% diminishing balance scheme “because of the risk of technological obsolescence.”

Required You have a meeting scheduled with Weissner this afternoon to discuss accounting policies and operating results; Baaz is still in the French Riviera. Write a brief report on which to base your discussion with Weissner. Outline the issues and alternatives, and then write an analysis of each issue and your recommendation. Write a separate note that states your likely course of action should Weissner not accept your recommendations.

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