ACC 455 Week 3 MyAccountingLab, Week 3

Access the MyAccountingLab software and complete this week’s assignments

Identify which of the following statements is true.

A.

An individual engaged in the active conduct of a business must elect not to be taxed as a partnership.

B.

Formation of a partnership requires legal documentation.

C.

A partnership exists as long as there are at least two individuals or entities engaged in the active conduct of a trade or business or a financial operation, and the business is not a trust or a corporation.

D.

All of the above are false.

Identify which of the following statements is true.

A.

All of the partners in a limited partnership have limited liability.

B.

A limited partnership must have at least two general partners.

C.

A limited partnership cannot have a corporate general partner.

D.

All of the above are false.

Identify which of the following statements is true.

A.

Distribution of partnership income in the form of cash to partners is generally tax-free to the partners and the partnership.

B.

If money distributions exceed the partner’s basis in the partnership interest, the partner would have to recognize gain on the distribution from the partnership. Such gain is usually an ordinary gain.

C.

When partners receive cash distributions from the partnership, they pay taxes on those distributions.

D.

All of the above are true.

George pays $10,000 for a 20% interest in a general partnership, which has recourse liabilities of $20,000. The partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. George’s basis in his partnership interest is

A.

$12,000.

B.

$14,000.

C.

$10,000.

D.

$30,000.

Identify which of the following statements is true.

A.

A partnership cannot have an NOL carryback or carryforward.

B.

A partnership cannot make charitable contributions.

C.

Dividends received by a partnership from a domestic corporation are included in the partnership’s ordinary income.

D.

All of the above are false.

Matt and Joel are equal partners in the MJ Partnership. For the current year ended December 31, the partnership has book income of $80,000, which includes the following deductions: (1) guaranteed payments (salaries) to partners: Matt, $35,000; and Joel, $25,000; and (2) charitable contributions, $6,000. The book income amount does not include any sales of capital assets or Sec. 1231 assets or any tax-exempt income. Based on the above information, what amount should be reported as ordinary income on the partnership return?

A.

$60,000

B.

$80,000

C.

$140,000

D.

$86,000

Which of the following corporate tax levies are imposed on an S corporation?

A.

accumulated earnings tax

B.

corporate alternative minimum tax

C.

corporate income tax

D.

None of these taxes are imposed on an S corporation.

Identify which of the following statements is true.

A.

The S corporation’s separately stated items are in general the same ones that apply in partnership taxation.

B.

An election for an S corporation to use the Sec. 179 expensing election is made by the corporation and not by its shareholders.

C.

An S corporation cannot claim a dividends-received deduction.

D.

All of the above are true.

S shareholders are allocated shares of income, gain, loss, deduction, and credit based on their number of shares of stock and period of time for which the stock is held.

True

False

An electing S corporation has a $30,000 ordinary loss for the nonleap year. On January 1, Beverly and Sonya own equally all of the S corporation stock. On the 146th day of the year, Beverly gives her

oneminus−half

of the S corporation stock to her daughter Becky. How much of the $30,000 ordinary loss is allocated to Beverly?

A.

$5,959

B.

$6,000

C.

$25,000

D.

$15,000

Jane contributes valuable property to a partnership in exchange for a general partnership interest. The partnership also assumes the recourse mortgage Jane incurred when she purchased the property two years ago.

1. How will the liability affect the amount of gain that Jane must recognize?
2. How will it affect her basis in the partnership interest?
3. How will the liability affect the amount of gain that Jane must recognize?

A.

Jane recognizes gain on the contribution of property and assumption of a liability if the amount of the liability assumed by the other partners exceed Jane’s basis in the contributed property plus her share of existing partnership liabilities.

B.

Jane recognizes a gain in an amount equal to the liability assumed by the partnership.

C.

Jane recognizes no gain or loss on the contribution of property and the partnership’s assumption of the related liability. Jane would only have recognized a gain if the property had no liability associated it.

D.

No gain or loss is recognized on the contribution of property regardless of whether or not the partnership assumes a liability associated with the contributed property.

1. How will it affect her basis in the partnership interest?

A.

Her basis in the partnership interest will be increased by the amount of the liability assumed by the other partners.

B.

Her basis in the partnership interest will be decreased by the amount of the liability that she assumes.

C.

Her basis in the partnership interest will be decreased by the amount of the liability assumed by the other partners.

D.

There is no effect on her basis in the partnership interest.

On January 1, Jan, Kristi, and Shirley form a partnership. The contributions of the three individuals are listed below. Jan received a 20% partnership interest, Kristi received a 70% partnership interest, and

Shirley received a 10% partnership interest. They share the economic risk of loss from recourse liabilities according to their partnership interests.

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Kristi has claimed $16,000 of straight-line MACRS depreciation on the building. The land and building are subject to a $64,000 mortgage, of which $25,600 is allocable to the land and $38,400 is allocable to the building. The partnership assumes the mortgage.

Shirley is an attorney, and the services she contributes are the drawing-up of all partnership agreements.

Read the

requirements

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Requirement a. What amount and character of gain, loss, or income must each partner recognize on the formation of the partnership? (If no gain, loss, or income is recognized by a partner, enter a “0” in the amount column and leave the character column blank.)

Requirement b. What is each partner’s basis in her partnership interest?

Requirement c & d. What is the partnership’s basis in each of its assets? What is the partnership’s initial book value of each asset? (Enter a “0” for any zero balances.)

Requirement e. To raise some immediate cash after the formation, the partnership decides to sell the land and building to a third party and lease it back. The buyer pays $38,400 cash for the land and $57,600 cash for the building in addition to assuming the $64,000

mortgage. Assume the partnership claimed no additional depreciation on the building before the sale. What is each partner’s distributive share of the gains, and what is the character of the gains?

Begin with the sale of the land. Select the partner(s) who will recognize a distributive share of the gain. Enter the amount and character of the gain to be recognized by each applicable partner. (If no gain is recognized by a partner, do not select the partner’s name in the first column; then leave the remaining columns blank.)

Now consider the sale of the building. Select the partner(s) who will recognize a distributive share of the gain. Enter the amount and character of the gain to be recognized by each applicable partner. (If no gain is recognized by a partner, do not select the partner’s name in the first column; then leave the remaining columnsblank.)

On January of the current year, Margaret (15%), Darrick(35%), and Dee (50%) are partners in the UPC Partnership. During the current year, UPC

reports the following results. All items occur evenly throughout the year unless otherwise indicated. Assume the current year is not a leap year.

Requirements

Requirement a. What are the distributive shares for each partner, assuming they all continue to hold their interests at the end of the year?

Requirement b. Assume that

Margaret

purchases a 10% partnership interest from Darrick on July 1 so that Margaret and Darrick each own 25%

from that date through the end of the year. What are Margaret and Darrick’s

distributive shares for the current year? (Use 365-day year for date ratios. Do not round date ratios or any interim calculations. Round your final answer to the nearest whole dollar.)

First calculate the partnership’s income split before and after the ownership changes.

Now, calculate each partner’s distributive share of the partnership results. First for the period January 1 through June 30, then for the period July 1 through December 31. (Round to the nearest whole dollar.)

Can a recourse debt of a partnership increase the basis of a limited partner’s partnership interest? Explain.

A.

No, because a limited partner normally has no economic risk for recourse debt.

B.

Yes, because a limited partner’s basis in his or her partnership interest is dependent upon any debt or income the partnership acquires.

C.

Yes, because a limited partner normally has a large economic risk for recourse debt.

D.

No, because a limited partner’s basis in his or her partnership interest is based primarily on the profit ratio.

Review the following independent situations:

Requirement

What is

Kelly’s basis for her partnership interest in each of the independent situations? The partners share the economic risk of loss from recourse liabilities according to their partnership interests. (Use parentheses or a minus sign for subtractions. Leave any unused cells blank.)

Situation a.

Kelly receives her 20% partnership interest for a contribution of property having a $14,000 basis and a $17,000 FMV. The partnership assumes her $10,000 recourse liability but has no other debts.

Situation

1. b.

Kelly receives her 20% partnership interest as a gift from a friend. The friend’s basis (without considering partnership liabilities) is $34,000.

The FMV of the interest at the time of the gift is $36,000.

The partnership has liabilities of $100,000 when Kelly receives her interest. No gift tax was paid with respect to the transfer.

Situation c.

Kelly inherits her 20% interest from her mother. Her mother’s basis was $140,000.

The FMV of the interest is $120,000 on the date of death and $160,000

on the alternate valuation date. The executor chooses the date of death for valuing the estate. The partnership has no liabilities.

Lance and Rodney are contemplating starting a new business to manufacture computer software games. They expect to encounter losses in the initial years. Lance’s CPA has talked to them about using an S corporation. Rodney, while reading a business publication, encounters a discussion on limited liability companies(LLCs). The article talks about the advantages of using an LLC instead of an S corporation. How would you respond to their inquiry?

A.

The basis of the S corporation shareholder’s interest includes a ratable share of the S corporation’s liabilities. This amount can be greater than the basis in the S corporation’s stock and permits a greater loss or deduction pass-through.

B.

An LLC has no restrictions on the type or number of owners. An S corporation is limited to 100 shareholders, none of which may be a corporation or a partnership.

C.

An S corporation is not subject to corporate-level taxes which is advantageous to Lance and Rodney who will be starting a new business and will not have the excess cash to pay the taxes required in an LLC.

D.

S corporations are flow-through entities that simplify the accounting books and records. An LLC is a complex entity to set up and requires many difficult calculations.

Matt and Linda are equal shareholders in ML Corporation, an S corporation. The corporation, Matt, and Linda are calendar year taxpayers. The corporation has been an S corporation during its entire existence and thus has no accumulated E&P. The shareholders have no loans to the corporation. The corporation incurred the following items in the current year:

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Requirements

Requirement a. Compute the S corporation’s ordinary income and separately stated items.

Begin by computing the S corporation’s ordinary income.

Select the S corporation’s separately stated items. (Use parentheses or a minus sign for loss or expense amounts. Abbreviation used: M and E = meals and entertainment.)

Requirement b. Show

Matt’s and Linda’s

shares of the items in Part a.

Requirement c. Compute Matt’s and LindaLinda’s ending stock bases assuming their beginning balances are $75,000 each. Begin by entering the beginning basis for each shareholder. Determine the items and amounts which increase each shareholder’s basis, then the items and amounts which decrease each shareholder’s basis. Finally, compute each shareholder’s ending basis. (Use parentheses or a minus sign for loss or expense amounts.)