A and B form a partnership where A, the limited partner, contributes $500,000 and B, the general partner contributes no cash. The partnership secures a $2 million (10 percent interest only) nonrecourse loan and acquires AB Apartments for $2.5 million. Assume that the results from the first year of operations of AB Apartments are as follows:Net operating income $ 250,000Less debt service (interest only) 200,000Before-tax cash flow $ 50,000Assume that tax depreciation the first year is $250,000.The partnership agreement provides that 90 percent of all taxable income, loss, and cash flow from operations is to be allocated to A and 10 percent to B. At resale, taxable gains or losses are to be split 50–50 between A and B, and cash proceeds are distributed first to A in an amountequal to his original investment less any cash distributions previously received, and then split 50–50 between A and B.a. What are the capital account balances for A and B after one year?b. Assume that AB Apartments is sold after year 1 for $3 million with no expenses of sale. How much cash is available (before tax) from the sale?c. How much cash would be distributed to A and B upon the sale of the property?d. How much capital gain would be allocated to A and B upon the sale of the property?e. Calculate the capital account balances for A and B after the sale.
Partnership Accounting
A partnership is a kind of arrangement between two or more people whereby they agree to manage the business operations and share its profits and losses in an agreed ratio between them. The agreement that is drafted and signed by the partners of the firm is termed as partnership deed and contains various important clauses agreed between the partners such as profit/loss sharing, interest on capital, remuneration allocation of each partner, drawings, admission of a new partner, etc.
Partner Admission and Withdrawal
A partnership is a kind of arrangement between two or more people whereby they agree to manage the business operations and share its profits and losses in an agreed ratio between them. The agreement that is drafted and signed by the partners of the firm is termed as a partnership deed and contains various important clauses agreed between the partners such as profit/loss sharing, interest on capital, remuneration allocation of each partner, drawings of a partner, etc.
A and B form a
Net operating income $ 250,000
Less debt service (interest only) 200,000
Before-tax
Assume that tax
The partnership agreement provides that 90 percent of all taxable income, loss, and cash flow from operations is to be allocated to A and 10 percent to B. At resale, taxable gains or losses are to be split 50–50 between A and B, and cash proceeds are distributed first to A in an amount
equal to his original investment less any cash distributions previously received, and then split 50–50 between A and B.
a. What are the capital account balances for A and B after one year?
b. Assume that AB Apartments is sold after year 1 for $3 million with no expenses of sale. How much cash is available (before tax) from the sale?
c. How much cash would be distributed to A and B upon the sale of the property?
d. How much
e. Calculate the capital account balances for A and B after the sale.
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