Partners Owens and Wilson have a coin-operated laundry business in a retail shopping center. The business has operated for several years with the partners sharing income equally. They employ two part-time workers. The part-time employees work alternating shifts and are only there if either Owens or Wilson is present.

The laundry business is primarily a cash business. On alternate days each partner empties the coins from the laundromats machines and deposits them in the bank. The business was generating a healthy cash flow for several years. However, in the last 18 months, cash flow declined precipitously. Wilson believes that the decline in cash is a result of collusion between the two part-time workers. Wilson assumes that the workers are somehow rigging the machines and requiring the customers to pay them directly. When Wilson shares these concerns with Owens, Owens assures Wilson that the part-time workers are not stealing money.

Dr (Cr) Cash $43,000 Supplies and prepayments 1,800 Equipment 58,000 Accumulated depreciation -23,200 Accounts payable -2,350 Loan payableWilson -15,000 Sales -49,410 Operating expenses 18,700 Depreciation expense 5,800 CapitalOwens -10,500 CapitalWilson -26,840 Totals $0

In addition, the partnership has a contractual lease on the building where the laundromat is located. The lease expires five years from now. The monthly payments of $500 are consistently made on time and recorded as part of operating expense. If the lease is terminated early, the lessor requires a $2,000 payment for early lease termination. Required: 1. Identify the weakness in the partnerships internal control which could produce the pattern of declining cash flows. How could the partnership correct the internal control weakness? Explain. 2. Do you think an ethical breach has occurred? Explain. 3. What are the various ways of resolving the ethical issues? Discuss each. 4. What is the best resolution for the ethical issue? Why? Explain. 5. How much must be realized on the sale of the non-cash assets before Owens receives any of the liquidation proceeds? Do you think it is likely that Owens will receive any proceeds? Explain.