Fall_2011_Partnership_problem - Dehna Partnership problem...

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Unformatted text preview: Dehna Partnership problem The Dehna Partnership is a calendar year, cash basis limited partnership which was formed on 1 January 2010. The partnership is in the business of dressage (competitive horse training)(business code 541990). The address for the partnership and both partners is 300 Montgomery Street, Suite 1050, San Francisco, CA 94104. All business is carried on in the San Francisco Bay Area, and the partnership has no foreign activities of any kind. The partnership return is filed in Ogden, Utah. The partnership's federal ID number is 94‐0070070 . The partnership agreement follows the provisions of IRC Section 704 and provides that gains , losses, and depreciation will be allocated in such a manner so as to account for the differences between agreed market values and the tax basis of assets contributed to the partnership. For example, should the agreed value exceed the tax basis of a contributed asset, any gain due to the difference shall be allocated to the contributing partner upon sale of the asset. Any remaining gain shall be allocated in the "regular" ratio in which partners share income and losses. Furthermore, depreciation expense on contributed assets is to be allocated to the noncontributing partner as if the asset's FAIR MARKET VALUE were EQUAL to its tax basis; any remaining depreciation is to be allocated to the contributing partner. Outside of the special IRC Section 704 allocations discussed in the preceding paragraph, all other items are allocated in the "normal" profit and loss ratios for the partnership. Data on the partners, the assets contributed by them, and the profit and loss ratios agreed upon are as follows: Tara Stephens (SSN: 007‐06‐1991), the general partner Kevin Fell (SSN: 006‐01‐1985), the limited partner. Tara ‐ 60% profit & loss ratio. Tara contributed a parcel of land (acquired on 1/1/1995 as investment property) and its related mortgage. The land originally cost $208,000 and had a fair market value of $350,000 as of the date it was contributed to the partnership. There was a $180,000 balance on the qualified nonrecourse mortgage assumed by the partnership. The land is known as "Dragon Acres". The capital contribution of the land and its related mortgage was made on the date the partnership was formed. The land was used by the Partnership as a location to train the horses. Kevin ‐ 40% profit & loss ratio. Kevin contributed a horse training machine valued at $100,000 . The training machine was acquired on 1/1/2005 at a cost of $150,000 . The machine originally had a ten year life (5 years left @1/1/2010) and is depreciated on the straight‐line method using a 10 year life at the rate of $15,000 of depreciation per year. Accumulated depreciation of $75,000 had been properly claimed from 1/1/2004 through 12/31/2009, so the machine had a net tax basis of $75,000 ($150,000 cost less $75,000 accumulated depreciation through 12/31/2009) as of the date it was contributed to the partnership. The partnership keeps its books on the tax basis method with appropriate supporting schedules maintained to keep track of fair market value where required. Each partner's ownership of capital is per the books. Dehna Partnership problem A trail balance is attached as a separate excel spreadsheet. The trail balance contains all cash activity for the year EXCEPT for the transactions noted below which YOU will have to prepare journal entries to record. A. You need to make a journal entry to record Tara's capital contribution of the land subject to the mortgage as of 1/1/2010 B. You need to make a journal entry to record Kevin's capital contribution of the training machine as of 1/1/2010. C. On 12/31/2010 (the last day of the year), the partnership purchased a new piece of land (Redbluff ) for $3,500,000. The $3,500,000 purchase was financed via a $500,000 RECOURSE LOAN from Union Bank and a $3,000,000 QUALIFIED NONRECOURSE FINANCING from Wells Fargo Bank. The recourse loan plus one year's interest at 10% is due in full on 12/31/2011, and no interest is payable until maturity. The qualified nonrecourse loan requires quarter payments of interest only (7% annual rate) with the first quarterly interest payment of $52,500 not being due until 3/31/2011(i.e., next year). This land will be used as a larger site on which to train the dogs & cats ‐ i.e., it'll be used as business land. D. You need to record the depreciation expense on the training machine. Please note that the machine is deprecated using a 10 year life for both regular and "alternative minimum tax" depreciation. As noted in the facts, the machine's tax depreciation is $15,000 ($150,000 original cost divided by 10 years). If the machine's depreciation had been based on it's $100,000 FMV, the depreciation based on FMV would have been $10,000 ($100,000 FMV divided by the 5 year remaining life). You're going to have to figure out what to do and how to allocate the depreciation between the partners. E. As shown on the attached excel spreadsheet, the business purchased $625,000 of additional training equipment. This equipment was purchased on day the partnership was formed, and it has been fully paid for as of the end of the year. The partnership desires to claim the MAXIMUM depreciation allowed under the tax law, so you'll need to compute this and prepare a journal entry recording the depreciation. F. The property contributed by Tara was known as "Dragon Acres". This property was SOLD on July 4th of the current year for $550,000 ($370,000 of cash AND the buyer assumed the $180,000 loan). The property increased in value dramatically during the year, and both partners agree the increase in value occurred during the current year. The $370,000 cash is shown in a separate account, but no entry has been made to record the sale, so you'll need to make the journal entry necessary to record the sale AND decide how to allocate the gain between the two partners. Dehna Partnership problem REQUIRED: 1. Prepare journal entries to record the events listed in "A" through "F" above. Label the entries "A" through "F". YOU MUST TURN IN THE JOURNAL ENTRIES WHEN DUE. 2. Prepare the books, ie balance sheet and income statement & post the AJEs. 3. Prepare a partnership return for 2010 using the actual forms to include two Schedule K‐1s (one for the general and the other for the limited). Please manually prepare any supporting schedules you need (such as a depreciation schedule). 4. Please do NOT forget to complete the sections on "self‐employment tax" and "alternative minimum tax". If you have difficulty in computing the allocations of self‐employment tax and "AMT", don't worry since we'll cover them in class. ROUND EVERYTHING TO THE NEAREST DOLLAR ‐ I.E. OMIT PENNIES A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Dehnna Partnership ‐ 2010 B Student name: Cash Activity for 2010 Debits (Credits) Cash in Presidio Bank account Cash, Union Bank from Dragon Acres sale 710,000 370,000 Horse training equipment Accum depr, dog training equipment Other equipment, bot 1/2/2010 Accum depr, other equipment 625,000 Land, Dragon Acres (sold 7/4/2010) Land, Redbluff (bought 12/31/10) Qualified nonrecourse mortgage, Redbluff Recourse loan to Union Bank (Dragon Acres) Qualified nonrecourse loan ‐ WFB (Redbluff) Suspense ‐ cash from Dragon acres sale Tara Capital (60% general partner) capital contributed drawings during the year net P&L allocation for the year Kevin Capital (40% limited partner) capital contributed drawings during the year net P&L allocation for the year P&L for the year BEFORE adjustments & closing Balance Sheet Totals (370,000) 54,000 36,000 (1,425,000) 0 A 1 2 3 4 5 6 7 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 Dehnna Partnership ‐ 2010 B Student name: Cash Activity for 2010 Debits (Credits) REGULAR P&L ITEMS Awards Salaries for the year Payroll taxes for the year Business entertainment expense for the year at 100% Nondeductible entertainment Rent expense for the year Guaranteed payment to Tara for her management services (this is in ADDITION to her drawings) California LLP filing fee/tax Interest expense paid during the year Other deductible business expenses Depreciation on the "other equipment" ALLOCATED P&L ITEMS Specially allocated depreciation on " training equip" Section 179 expense on the "other equip" bot in the year Charitable contribution (50% qualifying charity) Interest income for the year Nondeductible entertainment Gain on the sale of Dragon Acres Net P&L for the year (2,775,000) 650,000 65,000 50,000 80,000 48,000 800 5,400 454,800 0 20,000 (24,000) (1,425,000) ...
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This note was uploaded on 11/06/2011 for the course ACCTG 361 taught by Professor J during the Fall '11 term at Golden Gate.

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