Question

The ABC partnership has three partners, A, B, and C, who each has an equal interest in partnership capital, profits, and losses. To pay off expenses incurred by the partnership, C contributed additional capital on October 31 of the current year. As a result of C's contribution, the partners' interests in the partnership capital, profits, and losses changed to 25% for A, 25% for B, and 50% for C. The partnership is an accrual method, calendar year taxpayer.

a) If the partnership loses $24,000 in the current year and the partners use the proration method for allocations, how will the losses be allocated?

b) What results if the facts are the same as in (a) above, except that the entire $24,000 loss was incurred during the first half of the year but the expenses that created that loss were paid on November 15 with cash contributed to the partnership by C, all other income and deductions of the partnership accrued ratably throughout the year, and the partnership uses the interim closing of the books method of allocation?

c) Assume the facts are the same as in (a) above, except that the partnership is a cash method taxpayer, the partnership uses the interim closing of the books method of allocation, and all income and deduction items, other than the $24,000 loss, were received or incurred ratably throughout the year. What result if:

i) The loss is the result of payment on November 15 of $24,000 to rent an office for the entire year?

ii) The partnership breaks even for the year, but the loss is the result of a settlement of a breach of contract suit brought by plaintiff. Settlement is made on June 1 and payment is made on November 15?

iii) The loss in (i) above, is the result of the payment on March 1 of the current year of $24,000 rent past due from the previous year?

Answer 1

a)
		Partner A	Partner B	Partner C
Upto 31 October
Profit/Loss Sharing Ratio		1/3	1/3	1/3
Loss for 9 months
(24000 x 9/12)	$18,000	$6,000	$6,000	$6,000
After 31 October
Profit/Loss Sharing Ratio		25%	25%	50%
Loss for remaining 3 months
(24000 x 3/12)	$6,000	$1,500	$1,500	$3,000
Total Loss	$24,000	$7,500	$7,500	$9,000
b)
Since accrual method of accounting is followed, the date on which the payment
is made will not affect the sharing of Loss
Hence the calculation would be same as a) above
c)
i)
If the payment for the losses are made on after 31 October and the firm follow
the cash basis accounting, then the losses would be shared in new profit sharing ratio
Hence
A = 24000 x 25%	-$6,000
B = 24000 x 25%	-$6,000
C = 24000 x 50%	-$12,000
ii)
In case of breakeven, and the payment being made after 31 October, then there must
be a profit of $24,000 in the before Oct 31, which in off-set by payment loss of $24,000
on Nov 15
Hence
		Partner A	Partner B	Partner C
Upto 31 October
Profit/Loss Sharing Ratio		1/3	1/3	1/3
Profit for 9 months
	$24,000	$8,000	$8,000	$8,000
After 31 October
Profit/Loss Sharing Ratio		25%	25%	50%
Loss for remaining 3 months
	-$24,000	-$6,000	-$6,000	-$12,000
Total Profit/Loss	$0	$2,000	$2,000	-$4,000
iii)
In cash basis accounting, the expenses are recognised as and when the payments are made.
Hence, the loss would be recognised on 1 March of the current year
It would be apportioned on old Profit/loss sharing ratio
A = 24000 x 25%	-$8,000
B = 24000 x 25%	-$8,000
C = 24000 x 50%	-$8,000