Answered: a. What is the total amount realized by…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

BDD Partnership is a service-oriented partnership that has three equal gen- eral partners. One of them, Barry Evans, sells his interest to another partner, Dale Allen, on December 31 (the last day of the current tax year), for $90,000 of cash and the assumption of Barry’s share of partnership liabilities. (Liabilities are shared equally by the partners.)

Immediately before the sale (after reflecting operations for the year), the partner- ship’s cash basis balance sheet is as shown below. Assume that the capital accounts before the sale reflect the partners’ bases in their partnership interests, excluding liabilities. The payment exceeds the stated fair market value of the assets because of goodwill that is not recorded on the books.

a. What is the total amount realized by Barry on the sale?

b. How much, if any, ordinary income must Barry recognize on the sale?

Basis
FMV
Basis
FMV
$120,000
$ 30,000
$ 30,000
Note payable
Capital accounts
Cash
$120,000
Accounts receivable
-0-
90,000
Capital assets
30,000
75,000
Barry
40,000
85,000
David
40,000
85,000
Dale
40,000
$150,000
85,000
$285,000
Total
$150,000
$285,000
Total

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