hree friends, X Y and Z decide to form a partnership to carry on a business trading in used cars. X has experience working as a manager and salesman. Y is a skilled motor mechanic. Z is wealthy. The general idea is that Z will be a sleeping partner whose only role is to supply capital for the business. X will be responsible for sales and day to day management of the firm's business. Y will be responsible for purchases of cars and repair work. The firm has a written partnership agreement that contains the above information and further provides; the firm will carry on business using the name XYZ Motors profits and losses shall be shared equally X and Y shall give their full time and attention to the business Continuing partners shall be entitled to buy-out any partner wishing to retire at an agreed price or failing agreement on price at a figure determined by an independent valuer. After the firm has been in operation for several months Z is served with writs for three legal actions. Customer sues Z as a partner in the firm XYZ Motors claiming compensation for loss suffered in consequence of relying on false statements made by X when selling a car to Customer. Dealer sues Z as a partner in the firm XYZ Motors claiming payment for two used cars purchased by X on behalf of the firm. Buyer sues Z as a partner in the firm XYZ Motors claiming return of a 'refundable deposit' paid to X on behalf of the firm when Buyer was considering purchasing a used car from the firm. Inquiries by Z establish that allegations made in the three claims are all true. Z also discovers that X had obtained refundable deposits from a number of prospective buyers and all the deposit money has been used by X in romancing his girlfriend. Advise Z whether the claims made against him personally are likely to be successful.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Three friends, X Y and Z decide to form a partnership to carry on a business trading in used cars. X has experience working as a manager and salesman. Y is a skilled motor mechanic. Z is wealthy. The general idea is that Z will be a sleeping partner whose only role is to supply capital for the business. X will be responsible for sales and day to day management of the firm's business. Y will be responsible for purchases of cars and repair work.

The firm has a written partnership agreement that contains the above information and further provides;

the firm will carry on business using the name XYZ Motors
profits and losses shall be shared equally
X and Y shall give their full time and attention to the business
Continuing partners shall be entitled to buy-out any partner wishing to retire at an agreed price or failing agreement on price at a figure determined by an independent valuer.

After the firm has been in operation for several months Z is served with writs for three legal actions.

Customer sues Z as a partner in the firm XYZ Motors claiming compensation for loss suffered in consequence of relying on false statements made by X when selling a car to Customer.

Dealer sues Z as a partner in the firm XYZ Motors claiming payment for two used cars purchased by X on behalf of the firm.

Buyer sues Z as a partner in the firm XYZ Motors claiming return of a 'refundable deposit' paid to X on behalf of the firm when Buyer was considering purchasing a used car from the firm.

Inquiries by Z establish that allegations made in the three claims are all true. Z also discovers that X had obtained refundable deposits from a number of prospective buyers and all the deposit money has been used by X in romancing his girlfriend.

Advise Z whether the claims made against him personally are likely to be successful.

Definition Definition Arrangement between two or more people whereby they agree to manage business operations and share its profits and losses in an agreed ratio. The agreement drafted and signed by the partners of the firm is termed as a partnership deed and contains various important clauses agreed between the partners such as profit/loss sharing, interest on capital, remuneration allocation of each partner, and drawings of a partner.

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