Reference - Grooming Losses

question 38

Multiple Choice

Reference - Grooming Losses. Wally, Beverly, and Matthew formed a partnership to groom dogs. Unfortunately, the business did not go as well as expected and the partnership incurred some losses. The articles of partnership did not allocate profits or losses. Matthew claimed that he should not have to share in losses because he had groomed more dogs than anyone. Matthew also claimed that although the partnership did not reference compensation for additional duties, he was entitled to compensation because of his excessive work. Beverly claimed that she should not have to share in losses because she contributed more capital than did either of the others. Wally claimed that he should not have to cover the losses because both Beverly and Matthew had been hiding the books from him. He demanded to inspect the books and also to a review and listing of all partnership assets and profit. Beverly and Matthew denied that Wally was entitled to a review of the books and stored them in a safe deposit to which only Beverly had a key. They claimed complete innocence of any wrongdoing. Is Wally entitled to inspect the books?

• A) Only if he is the managing partner.
• B) Only if he can establish fraud on the part of another partner.
• C) Only if the articles of partnership specifically gave him that right.
• D) Only if the articles of partnership specifically gave him that right or the other partners voluntarily agreed.
• E) Yes.

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Definitions:

Actual Fraud

Refers to intentional deception made for personal gain or to damage another individual.

Material Fact

An important fact that if known might influence a decision maker’s decision, such as in a contract negotiation or in the dissemination of information to investors.

Mislead

To cause someone to have a wrong idea or impression about someone or something.

Ultramares Rule

A doctrine limiting the liability of auditors to third parties for negligence, except in cases of fraud or misrepresentation.