Week 1 C15 1 a Discuss why a partnership agreement may need features in addition to the income and loss sharing ratio 1 The name of the partnership and the names of the partners 2 The type of business to be conducted by the partnership and the duration of the partnership agreement 3 The initial capital contribution of each partner and the method by which to account for future capital contributions 4 A complete specification of the profit or loss distribution including salaries interest on capital balances bonuses limits on withdrawals in anticipation of profits and the percentages used to distribute any residual profit or loss 5 Procedures used for changes in the partnership such as admission of new partners and the retirement of a partner 6 Other aspects of operations the partners decide on such as the management rights of each partner election procedures and accounting methods b Discuss the arguments in favor of recording salary and bonus allowances to partners as expenses included in computing net income Salaries and bonuses represent fixed amounts allocated to partners from the 100 000 earned during the period They are simply a form of profit distribution and not an expense of the partnership A salary as a fixed amount of company profits allocated to a given partner and bonus as portion of profits allocated to a partner based on a predetermined performance formula c What are the arguments against recording salary and bonus allowances to partners as partnership expenses The distribution process depends on the size of the profit or may differ if the partnership has a loss of the period The profit or loss distribution is recorded with a closing entry at the end of each period The revenues and expenses are often closed into an income summary account that is then allocated to the partners capital accounts based on the formula prescribed in the partnership agreement Salaries and bonuses to partners in the income statement reflect the true nature of these items d Some partnership agreements contain a provision for interest on invested capital in distributing income to the individual partners List the additional provisions that should be included in the partnership agreement so the interest amounts can be computed 1 The capital balance to be used as the base for interest the beginning period average simple or weighted for the period or ending of period balances 2 The rate of interest to be paid or the basis by which the rate is to be determined 3 When interest is to be determined in the profit or loss distribution process For example should salaries and bonuses be added to the capital accounts before interest is computed Case C16 6 a Describe the formation of the partnership including the date of formation and the purpose for the limited partnership Fairfield Inn by Marriott Limited Partnership the Partnership a Delaware limited partnership was formed on August 23 1989 own and Operate 50 Fairfield Inn by Marriott properties b Who was the initial general partner What was the general partner s initial percentage interest in the partnership And who was the general partner as of December 31 2003 The initial general partner was Fairfield FIBM One Corporation which garnered a 1 general partner interest The general partner also purchased units equal to a 10 limited partner interest at the closing of the offering c What was the general partner s profit percentage What economic reasons might the general partner have had for investing in this partnership The general partner s profit percentage was 1 acquired through the investment of 0 8 million The general partner is liable for the obligations of the partnership while the limited partners are only liable to the extent of their capital contribution General partners have operational control while limited partners account for their investments via the equity method d What were the major elements of the Restructuring Plan approved in 2001 by the limited partners the transfer of general partnership was from FIMB One to AP Fairfield GP LLC was replacing the Fairfield FMC Corporation as managers of the properties to an outside operator Sage Hospitalities The new franchise agreements were entered into with MII and leases were modified to provide savings on the leases Property improvement plans were also instituted and completed no later than November 30 2003 MII paid the non subordinated ground rent on a large loan because the partnership could not e What were the major elements of the Plan of Liquidation that was initiated in 2003 An agreement was entered upon in which the lenders and MII agreed to forbear collection and start liquidating the partnerships assets The partnership received specific amounts and percentages of the net proceeds from the sale of the inns An MII affiliate as ground lessor waived 1 2 million in rent for up to a year and other rent until the inn is sold or foreclosed upon whichever comes first During liquidation the inns would remain under the Fairfield Inn by Marriot flag until liquidated or until foreclosed upon on April 1 2005 f The partnership adopted the liquidation basis of accounting beginning on September 30 2003 Briefly describe the liquidation basis of accounting the partnership used The partnership adjusted their assets to the net realizable value and liabilities did to estimated settlement amounts which included the estimated cost of actual carrying out the liquidation Revenue and expenses were no longer collected or recorded on that date so with only changes in net realizable value being recorded g Compare the partnership s financial statements before and after the September 30 2003 adoption of the liquidation basis of accounting The adoption of the liquidation basis of accounting the financial statements are standard recording revenues expenses depreciation and so on a net loss each year of 2001 2002 and 2003 the subsequent allocation of those losses to the general and limited partners Following September 30 2003 the only real financial statement is the change in net liabilities according to the liquidation basis of accounting h The partnership filed a form 15 12G on May 1 2006 Obtain this filing What is the purpose of this form that is required by the SEC Certification and Notice of Termination of Registration under Section 12 g of the Securities Exchange Act of 1934 or Suspension of Duty to File Reports Under Sections 13 and 15 d of the Securities Exchange Act of 1934