h-1. If Reed sells his interest in Slicenhook to Indie Ruff, what is Indie's inside basis in Slicenhook? h-2. What effect would a 754 election have on Indie's inside basis?
h-1. If Reed sells his interest in Slicenhook to Indie Ruff, what is Indie's inside basis in Slicenhook? h-2. What effect would a 754 election have on Indie's inside basis?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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h-1. If Reed sells his interest in Slicenhook to Indie Ruff, what is Indie's inside basis in Slicenhook?
h-2. What effect would a 754 election have on Indie's inside basis?
Transcribed Image Text:Sales
Cost of goods sold
Interest income from tax-exempt bonds
Qualified dividend income from stock
Operating expenses
Depreciation (tax)
Equipment
Building
Interest expense on debt
Cash
Investment-tax exempts
Investment stock
Equipment-net of depreciation
Building-net of depreciation
The operating expenses include a $1,800 trucking fine that one of its drivers incurred for reckless driving and speeding
and meals expense of $6,000 (the meals were not provided by a restaurant).
Land
Total
By the end of 2023, Reed has had a falling out with Carrie and Doug and has decided to leave the partnership. He has
located a potential buyer for his partnership interest, Indie Ruff. Indie has agreed to purchase Reed's interest in Slicenhook
for $730,000 in cash and the assumption of Reed's share of Slicenhook's debt. Carrie and Doug, however, are not certain
that admitting Indie to the partnership is such a good idea. They want to consider having Slicenhook liquidate Reed's
interest on January 1, 2024. As of January 1, 2024, Slicenhook has the following assets:
Tax Basis
$ 147,000
30,000
$ 876,800
15,000
45,000
333,000
1,146,000
460,000
$ 2,875,800
Total
Cash
Investment stock
Equipment-$200,000 cost, net of depreciation
FMV
$ 876,800
18,000
45,000
600,000
1,440,000
$ 1,200,000
420,000
510,000
$ 3,489,800
900
1,500
132,000
177,000
96,000
Carrie and Doug propose that Slicenhook distribute the following to Reed in complete liquidation of his partnership
interest:
Tax Basis
$ 485,000
45,000
111,000
$ 641,000
FMV
$ 485,000
45,000
200,000
$ 730,000
Slicenhook has not purchased or sold any equipment since its original purchase just after formation.
Transcribed Image Text:Carrie D'Lake, Reed A. Green, and Doug A. Divot share a passion for golf and decide to go into the golf club
manufacturing business together. On January 2, 2022, D'Lake, Green, and Divot form the Slicenhook Partnership, a
general partnership. Slicenhook's main product will be a perimeter-weighted titanium driver with a patented graphite shaft.
All three partners plan to actively participate in the business. The partners contribute the following property to form
Slicenhook:
Partner
Carrie D'Lake
Reed A. Green
Doug A. Divot
Contribution
Land, FMV
Basis $460,000, Mortgage
Cash
Cash
Carrie had recently acquired the land with the idea that she would contribute it to the newly formed partnership. The
partners agree to share in profits and losses equally. Slicenhook elects a calendar year-end and the accrual method of
accounting.
Sales
Cost of goods sold
$ 460,000
$ 60,000
$ 400,000
$ 400,000
In addition, Slicenhook received a $1,500,000 recourse loan from Big Bank at the time the contributions were made.
Slicenhook uses the proceeds from the loan and the cash contributions to build a state-of-the-art manufacturing facility
($1,200,000), purchase equipment ($600,000), and produce inventory ($400,000). With the remaining cash, Slicenhook
invests $45,000 in the stock of a privately owned graphite research company and retains $55,000 as working cash.
Slicenhook operates on a just-in-time inventory system so it sells all inventory and collects all sales immediately. That
means that at the end of the year, Slicenhook does not carry any inventory or accounts receivable balances. During 2022,
Slicenhook has the following operating results:
Interest income from tax-exempt bonds
Qualified dividend income from stock
Operating expenses
Depreciation (tax)
§179 on equipment
Equipment
Building
Interest expense on debt
$ 39,000
81,000
24,000
$ 1,126,000
400,000
900
1,500
126,000
144,000
120,000
The partnership is very successful in its first year. The success allows Slicenhook to use excess cash from operations to
purchase $15,000 of tax-exempt bonds (you can see the interest income already reflected in the operating results). The
partnership also makes a principal payment on its loan from Big Bank in the amount of $300,000 and a distribution of
$100,000 to each of the partners on December 31, 2022.
The partnership continues its success in 2023 with the following operating results:
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