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.

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