Shannon and Art Are Each 10% Partners in the Such-A-Deal

question 16

Essay

Shannon and Art are each 10% partners in the Such-A-Deal Partnership. Due to several years of partnership operating losses, both Shannon and Art have a zero basis in their partnership interests. For the current year, the partnership is incurring a loss of $100,000. When he hears the news about the loss, Shannon tells Art he wishes the partnership management would go to the local bank and borrow "a couple of hundred thousand dollars." Art does not understand why Shannon would want the partnership to go into debt. The concept of debt makes Art very nervous; Art personally does not borrow money. In fact, Art does not even use credit cards. Explain to Art why Shannon wants the partnership to incur more debt. Also, comment on why Art's general concerns about debt have merit, specifically focusing on the partnership debt.

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Definitions:

Equivalent Units

A concept in cost accounting used to calculate the work done on partially completed goods, expressed in terms of fully completed units.

Cost Reconciliation Report

A document used to reconcile and verify the costs incurred by a department or project against the budgeted or expected costs.

Work In Process Inventory

Inventory that represents partially completed goods which are still in the production process.

Added To Production

Refers to the materials, labor, or overhead costs that are incorporated into the manufacturing process to produce goods.