Question
In: Accounting
Good Times is a general partnership with the following balance sheets: Basis FMV Cash $15,000 $15,000...
Good Times is a general partnership with the following balance sheets:
|
Basis |
FMV |
|
|
Cash |
$15,000 |
$15,000 |
|
Capital assets |
35,000 |
75,000 |
|
Land |
85,000 |
240,000 |
|
Totals |
$135,000 |
$330,000 |
|
Recourse liabilities |
$90,000 |
$90,000 |
|
Capital, Claire |
15,000 |
80,000 |
|
Capital, Lorie |
15,000 |
80,000 |
|
Capital, Tom |
15,000 |
80,000 |
|
Totals |
$135,000 |
$330,000 |
The partners share equally in profits, losses and capital. Tom is negotiating to sell his interest in the partnership to an unrelated buyer. Assume the buyer is willing to pay $120,000 cash for half Tom’s interest.
- What will be the amount realized by Tom on the sale?
- What is the tax basis of the interest to be sold by Tom?
- How much gain will Tom recognize on the sale?
- What will be the buyer’s tax basis in the newly acquired interest?
Solutions
Expert Solution
| Answer | |||||
| A. Calculation of realized amount by Tom on sale | |||||
| 1. It is given that the partners profit sharing ratio is eual. Share of profit of Tom will be 25% as four partners are in Good times. | |||||
| 2. A third party is willing to give 120,000 for half Toms interest. | |||||
| 3. Therefore, realized amount on the sale of Toms interest will be $ 240,000 | |||||
| (Assumed that Tom is going to sell entire interest in good times to third party) | |||||
| B. Calculation of Tax basis of Toms interest | |||||
| Assumption: In the question two balance sheets were given. Therefore, it is assumed that the one which has balance sheet total of $ 330,000 as FMV values and the other one as cost. Reason being the land value always appreciates. | |||||
| Sl No | Particulars | Amount $ | |||
| 1 | Total Assets (FMV) (Note 1) | 3,30,000 | |||
| 2 | Toms Interest (25%) | 82500 | |||
| Note 1: For the purpose of tax basis calculation, FMV of the asset has to be considered. Carrying cost of assets in Good times books is not relevant. | |||||
| C. Gain to Tom on sale | |||||
| Sl No | Particulars | Amount $ | |||
| 1 | Sale consideration | 240000 | |||
| 2 | Toms Interest | 82500 | |||
| 3 | Gain on sale | 157500 | |||
| D. Tax basis of buyer | |||||
| The tax basis of newly acquired interest will be $ 240,000. It is the cost the new buyer has spent in acquiring the interest. Therefore, it is his tax base. | |||||
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Inventory 305,000 290,000
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Debt 500,000 625,000
Common
Stock 50,000 75,000
Retained
Earnings 455,000 505,000
Total
Liabilities and
Equity 1,355,000 1,580,000
INCOME STATEMENT:
Revenue 3,500,000
Cost
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Sold 2,275,000
General
and
Administrative 515,000
Depreciation
Expense 120,000
Earnings
Before Interest and
Taxes 590,000
Interest
Expense 40,000
Pretax
Net
Income 550,000
Income
Taxes 167,000
Net
Income 383,000
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