John and Bjorn are partners in a newly formed partnership. John is in a higher tax bracket than Bjorn. The partnership purchases a piece of equipment for $1,000; the equipment is depreciable on a straight-line basis over five years. The partners agree to allocate all the depreciation deductions to John and gain on sale of the equipment up to $1,000 to John; any gain in excess of $1,000 will be shared between the partners. Assume that the allocations have economic effect and that the partners expect to sell the equipment for at least $1,000 in five years. Is the economic effect of the allocations substantial?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question

John and Bjorn are partners in a newly formed partnership. John is in a higher tax bracket than Bjorn. The partnership purchases a piece of equipment for $1,000; the equipment is depreciable on a straight-line basis over five years. The partners agree to allocate all the depreciation deductions to John and gain on sale of the equipment up to $1,000 to John; any gain in excess of $1,000 will be shared between the partners. Assume that the allocations have economic effect and that the partners expect to sell the equipment for at least $1,000 in five years. Is the economic effect of the allocations substantial?

Expert Solution
steps

Step by step

Solved in 2 steps

Blurred answer
Knowledge Booster
Partners and Partnerships
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education