Ratios, Borrower Cash Flow, and the First Way Out (#2 in series)
Q: When Loan to Shareholders is converted from LT Debt to equity, is there an affect to ownership % in a Partnership?
A: The ownership does indeed change. In the case of Sequoia Properties, note that Schumacher % of company capital went from $72,949 or 32.65% of total partners' capital at 12/31/2013 to $4,182,288 or 94.71% at 12/31/2014 according to the Statement of Changes in Partners' Capital on page 5 in the Sequoia Properties financial statements.
Whether such a change in ownership changes anything for the two partners is determined by the partnership agreement. As page 5 indicates, the two partners split the partnership net income when they both began the year with equal capital amounts in 2013. However, all the distributions went to Schumacher in that year.
In 2014, the same arrangement applied. The two partners split the partnership income and Schumacher continued to receive all the distributions. In effect, the change in relative ownership had no impact on the partnership income allocation nor on the allocation of distributions. Both those arrangements were likely stated in the partnership agreement.
Q: Why are we not adjusting the depreciation here like we did earlier? (Reference Slide 40)
A: The two approaches provide the same result as Slide 40 illustrates. One approach is to adjust the change in net property, plant, and equipment by depreciation expenses (and by any gain or loss on sale if one exists). For Sequoia Properties, the change in net property plant and equipment was a negative $1,340,776. Adjusted by depreciation expense of $16,258, the change in net fixed assets – or fixed asset spending – is $1,357,034.
The second approach is to mark up the ending 2014 balance of net property, plant, and equipment by the amount of depreciation expense for the year to arrive at a pre-write down amount for property, plant and equipment – $17,875,526. Then measure this adjusted amount by 2013 net property, plant, and equipment – $16,518,492. The difference between the two amounts is $1,357,034, which is identical to the result for the first method we used.
Q: Can you explain what the bank overdraft is?
A: A Bank Overdraft of $905,653 at the end of 2013 means that Sequoia Properties borrowed $905,653 above its credit line limits. It is unclear from the footnotes if the partnership had a short-term credit line in place. If not, the overdraft would refer to borrowing that exceeded its long-term credit line limits – perhaps approved and advanced by a lender in anticipation of a successful request for an increase in their construction financing or long-term financing.
A Book Overdraft is something different. It represents the amount by which a borrower would exceed its credit line limit if it released all checks written against the account in question, which were then deposited by the recipients.
Course overview: Ratios, Borrower Cash Flow, and the First Way Out