3.2.10. A schedule showing how the nonrecourse loan is allocated to the partners.
Tier 1 Minimum gain
Loan amount
Less: book value of property
Minimum gain
Tier 2 704(c) Pre-contribution gain
Loan amount
Less: Adjusted basis of property		Basis after formation less tax depreciation
Allocation to Bonnie
Tier 3 Excess allocated using profit percentages
Alan:
Bonnie:
Chuck:
Worksheet entry to Allocate Nonrecourse Debt:
		Dr		Cr
Worksheet Entry	M/P - APT 2	-
Allocating Nonrecourse			Alan's Basis	-
Debt to Outside			Bonnie's Basis	-
Basis			Chuck's Basis	-

November 17 ACC 611 - Partnership Case Study 1.0 Formation of the partnership The partnership distributed the land held for investment to Alan. At the time of the distribution, the land was valued at $316,000. The partnership agreement does not call for optional revaluations. The partners treated the transaction as a current distribution For the current year, the table below presents the revenue and expenses reported by the partnership from their rental operations. Total Alan Laurel and Bonnie Szabber have agreed to form a cash-basis general partnership, Slumland Partners, to own and operate apartment complexes in College Town, USA. As of January 1 of the current year, the partnership takes legal title to the contributed property and commences operations. At the time of formation, Alan contributed $280,000 cash and an apartment complex, Party Planet Apartments, valued at $2 million. Alan purchased the complex on April 12, three years ago for $1.6 million dollars and has been operating the property as a sole proprietorship. The property is subject to a recourse debt of $700,000 that is assumed by the partnership. Bonnie contributed $780,000 cash and an apartment complex, Dumpster View Apartments, valued at $2.9 million and investment land valued at $300,000. Bonnie purchased the complex on November 7, two years ago for $2.5 million and has been operating the property as a sole proprietorship. The complex is subject to a norrecourse debt of $2.4 million. The land was purchased on August 28, four years ago for $280,000 Party planet $525.000 Grease trap $225,000 3900 $1,500,000 Dumpster view $750.000 13,000 Rental receipts Office rent 9100 26,000 138,000 12,000 80.000 36,000 4200 82,000 6000 20,000 1800 3. Case requirements: See Excel Document to complete the case study 3.1. Formation of the partnership For the formation of the partnership, prepare: 01. G 02. The tax and book journal entries to record the formation of the partnership 03. Calculate the tax gains on formation and the character of these gains 04. A reconciliation of book assets and equity. 05 schedule showing how the recourse loan is to be allocated to the partners. 06. A schedule showing how the nonrecourse loan is allocated to the partners. 07. A reconciliation of inside and outside basis after formation. . 3.2. Partnership operations For the first year of operations, prepare: , : 01. The tax and book entries to record the operating events. 02. A schedule showing tax depreciation and book depreciation for the year. At the completion of the schedule, arrive at a book/tax difference. 03. A schedule allocating the book and tax depreciation to the partners. 04. A schedule that ties out cash from formation to the end of the year. 05. A schedule reconciling tax and book income. 06. A schedule allocating the income and deductions for the partnership (Schedule K) to the ) partners (Schedule K-1). 07. Closing entries 08. A reconciliation of book assets and equity. 09 schedule showing how the recourse loans are to be allocated to the partners. 10. A schedule showing how the nonrecourse loan is allocated to the partners. 11. A reconciliation of inside and outside basis at year end. 27,120 13,555 39.325 32,000 64,000 18,000 14,000 In November and December of the prior year, Alan and Bonnie paid $25,000 for expenses that qualify as organizational costs. During this time, they also paid $15,000 for costs that meet the definition of start-up expenses. The $40,000 expense was paid for evenly by the two partners. Immediately after formation, Alan and Bonnie agreed to admit Chuck Wohes to the partnership. In return for agreeing to manage the daily operations of the partnership, Chuck received a 10% interest in capital and profits. His interest in the partnership vests immediately. Utilities Supplies Property taxes Maintenance and cleaning Repairs Interest on loans Advertising Charitable contributions 96,000 230,000 51,000 80,000 30,000 116,000 15,000 34,000 14.000 4900 7000 2100 10,000 3500 5000 1500 1750 2500 750 5000 6000 2100 3000 900 14.000 20.000 16,000 50.000 40,000 3000 14,000 6,000 Political contributions Meals and entertainment Legal fees Accounting fees Auto expenses Insurance on properties Wages to employees does not include payments to Chuck) Health insurance for employees 2.0 Operations and other activity during the current year The partnership agreement states that Alan and Bonnie are to each receive cash draws of $7,000 per month beginning on January 31, of the current year. Any amounts by which the draws exceed his or her allocation of income for the year must be repaid to the partnership. Furthermore, Chuck is to receive a salary, in his capacity as a partner, of $50,000 payable regardless of the profitability of the partnership In addition to the results of operations, Slumland Partners incurred the following transactions: January 2 Partnership invested $200,000 in municipal bonds returning 4.5% interest and $250,000 in a money market account returning 2% interest (compute the interest using simple interest). The interest eamed in these accounts was transferred to the checking account. As a result, the investment balances remained unchanged at year end. January 2 Office space used as the headquarters for operations was rented. Rent for the first year of operations was $26.000. Office furniture was purchased for $20,000 and computers were purchased for $4000. The partnership elected to expense the cost of these items using $179. 450 20,000 1500 27,000 1050 15,000 8000 50,000 105,000 36,750 52,500 15,750 15,000 5250 7500 2250 Also, $25,000 of principal was paid on the loan on Party Planet Apartments, and $15,000 of principal was paid on the loan on Grease Trap Acres. The same results are expected for the next year. The loan on Dumpster View Apartments is interest only with a balloon payment due in 7 years. February 10 The partnership purchased an apartment complex, Grease Trap Apartments, for $1 million by paying $200,000 cash and financing the remainder with a recourse loan. The partnership agreement was amended at this time to indicate that 20% of the depreciation is to be specially allocated to Bonnie with the remaining 80% of the depreciation to be shared amongst the partners according to their loss sharing percentages. 2 3 November 17 ACC 611 - Partnership Case Study 1.0 Formation of the partnership The partnership distributed the land held for investment to Alan. At the time of the distribution, the land was valued at $316,000. The partnership agreement does not call for optional revaluations. The partners treated the transaction as a current distribution For the current year, the table below presents the revenue and expenses reported by the partnership from their rental operations. Total Alan Laurel and Bonnie Szabber have agreed to form a cash-basis general partnership, Slumland Partners, to own and operate apartment complexes in College Town, USA. As of January 1 of the current year, the partnership takes legal title to the contributed property and commences operations. At the time of formation, Alan contributed $280,000 cash and an apartment complex, Party Planet Apartments, valued at $2 million. Alan purchased the complex on April 12, three years ago for $1.6 million dollars and has been operating the property as a sole proprietorship. The property is subject to a recourse debt of $700,000 that is assumed by the partnership. Bonnie contributed $780,000 cash and an apartment complex, Dumpster View Apartments, valued at $2.9 million and investment land valued at $300,000. Bonnie purchased the complex on November 7, two years ago for $2.5 million and has been operating the property as a sole proprietorship. The complex is subject to a norrecourse debt of $2.4 million. The land was purchased on August 28, four years ago for $280,000 Party planet $525.000 Grease trap $225,000 3900 $1,500,000 Dumpster view $750.000 13,000 Rental receipts Office rent 9100 26,000 138,000 12,000 80.000 36,000 4200 82,000 6000 20,000 1800 3. Case requirements: See Excel Document to complete the case study 3.1. Formation of the partnership For the formation of the partnership, prepare: 01. G 02. The tax and book journal entries to record the formation of the partnership 03. Calculate the tax gains on formation and the character of these gains 04. A reconciliation of book assets and equity. 05 schedule showing how the recourse loan is to be allocated to the partners. 06. A schedule showing how the nonrecourse loan is allocated to the partners. 07. A reconciliation of inside and outside basis after formation. . 3.2. Partnership operations For the first year of operations, prepare: , : 01. The tax and book entries to record the operating events. 02. A schedule showing tax depreciation and book depreciation for the year. At the completion of the schedule, arrive at a book/tax difference. 03. A schedule allocating the book and tax depreciation to the partners. 04. A schedule that ties out cash from formation to the end of the year. 05. A schedule reconciling tax and book income. 06. A schedule allocating the income and deductions for the partnership (Schedule K) to the ) partners (Schedule K-1). 07. Closing entries 08. A reconciliation of book assets and equity. 09 schedule showing how the recourse loans are to be allocated to the partners. 10. A schedule showing how the nonrecourse loan is allocated to the partners. 11. A reconciliation of inside and outside basis at year end. 27,120 13,555 39.325 32,000 64,000 18,000 14,000 In November and December of the prior year, Alan and Bonnie paid $25,000 for expenses that qualify as organizational costs. During this time, they also paid $15,000 for costs that meet the definition of start-up expenses. The $40,000 expense was paid for evenly by the two partners. Immediately after formation, Alan and Bonnie agreed to admit Chuck Wohes to the partnership. In return for agreeing to manage the daily operations of the partnership, Chuck received a 10% interest in capital and profits. His interest in the partnership vests immediately. Utilities Supplies Property taxes Maintenance and cleaning Repairs Interest on loans Advertising Charitable contributions 96,000 230,000 51,000 80,000 30,000 116,000 15,000 34,000 14.000 4900 7000 2100 10,000 3500 5000 1500 1750 2500 750 5000 6000 2100 3000 900 14.000 20.000 16,000 50.000 40,000 3000 14,000 6,000 Political contributions Meals and entertainment Legal fees Accounting fees Auto expenses Insurance on properties Wages to employees does not include payments to Chuck) Health insurance for employees 2.0 Operations and other activity during the current year The partnership agreement states that Alan and Bonnie are to each receive cash draws of $7,000 per month beginning on January 31, of the current year. Any amounts by which the draws exceed his or her allocation of income for the year must be repaid to the partnership. Furthermore, Chuck is to receive a salary, in his capacity as a partner, of $50,000 payable regardless of the profitability of the partnership In addition to the results of operations, Slumland Partners incurred the following transactions: January 2 Partnership invested $200,000 in municipal bonds returning 4.5% interest and $250,000 in a money market account returning 2% interest (compute the interest using simple interest). The interest eamed in these accounts was transferred to the checking account. As a result, the investment balances remained unchanged at year end. January 2 Office space used as the headquarters for operations was rented. Rent for the first year of operations was $26.000. Office furniture was purchased for $20,000 and computers were purchased for $4000. The partnership elected to expense the cost of these items using $179. 450 20,000 1500 27,000 1050 15,000 8000 50,000 105,000 36,750 52,500 15,750 15,000 5250 7500 2250 Also, $25,000 of principal was paid on the loan on Party Planet Apartments, and $15,000 of principal was paid on the loan on Grease Trap Acres. The same results are expected for the next year. The loan on Dumpster View Apartments is interest only with a balloon payment due in 7 years. February 10 The partnership purchased an apartment complex, Grease Trap Apartments, for $1 million by paying $200,000 cash and financing the remainder with a recourse loan. The partnership agreement was amended at this time to indicate that 20% of the depreciation is to be specially allocated to Bonnie with the remaining 80% of the depreciation to be shared amongst the partners according to their loss sharing percentages. 2 3