Charles and Mary formed CM Partnership on January 1 of the current year. Charles contributed Inventory A with a $100,000 FMV and a $70,000 adjusted basis for a 40% interest, and Mary contributed $150,000 cash for a 60% interest. The partnership operates on a calendar year. The partnership used the cash to purchase equipment for $50,000, Inventory B for $80,000, and stock in ST Corporation for $5,000. The partnership used the remaining $15,000 for operating expenses and borrowed another $5,000 for operating expenses. During the year, the partnership sold one-half of Inventory A for $60,000 (tax basis, $35,000), one-half of Inventory B for $58,000 (tax basis, $40,000), and the ST stock for $6,000. The partnership claimed $7,000 of depreciation on the equipment for both tax and book purposes. Thus, for the year, the partnership incurred the following items:
Sales—Inventory A …………………………… $60,000
Sales—Inventory B …………………………… 58,000
COGS—Inventory A ………………………… 35,000
COGS—Inventory B ………………………… 40,000
Operating expenses …………………………. 20,000
Depreciation ………………………………… 7,000
Short-term capital gain …………………….. 1,000
Interest on business loan …………………… 500
On December 31 of the current year, the partnership made a $1,000 principal payment on the loan and distributed $2,000 cash to Charles and $3,000 cash to Mary.
a. Determine partnership ordinary income for the year and each partner’s distributive share.
b. Determine the separately stated items and each partner’s distributive share.
c. Determine each partner’s basis in the partnership at the end of the current year.
d. Determine each partner’s book capital account at the end of the current year.
e. Provide an analysis of the ending cash balance.
f. Provide beginning and ending balance sheets using tax numbers.
g. Provide beginning and ending balance sheets using book values.