Answered: At the beginning of the current year,…

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

At the beginning of the current year, Ignatio and Bundy formed the IB Partnership by transferring cash and property to the partnership in exchange for a partnership interest, with each having a 50% interest. Specifically, Ignatio transferred property having a $65,000 FMV, a $38,000 adjusted basis, and subject to a $7,000 liability, which the partnership assumed. Bundy contributed $20,000 cash to the partnership. The partnership also borrowed $32,000 from the bank to use in its operations. All liabilities are recourse for which the partners have an equal economic risk of loss. During the current year, the partnership earned $22,000 of net ordinary income and reinvested this amount in new property.

a. What is the partnership's and each partner's gain or loss recognized on the formation of the partnership?

b. What is each partner's basis in his or her partnership interest at the end of the current year?

c. For the partnership, prepare a tax and book balance sheet at the end of the current year.

d.Assume instead that Ignatio and Bundy formed a corporation rather than a partnership. What is the corporation's and each shareholder's gain or loss recognized on the formation of the corporation? What is each shareholder's basis in his or her stock at the end of the current year?

Definition Definition Arrangement between two or more people whereby they agree to manage business operations and share its profits and losses in an agreed ratio. The agreement 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, and drawings of a partner.

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