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ACC 6 1 1 - Partnership Case Study 1 . 0 Formation of the partnership Alan Larron and Bonnie Srobber have agreed to form a
ACC Partnership Case Study
Formation of the partnership
Alan Larron and Bonnie Srobber have agreed to form a cashbasis general partnership, Slumland Partners, to own and operate apartment complexes in College Town, USA. As of January of the current year, the partnership takes legal title to the contributed property and commences operations. At the time of formation, Alan contributed $ cash and an apartment complex, Party Planet Apartments, valued at $ million. Alan purchased the complex on April three years ago for $ million dollars and has been operating the property as a sole proprietorship. The property is subject to a recourse debt of $ that is assumed by the partnership. Bonnie contributed $ cash and an apartment complex, Dumpster View Apartments, valued at $ million and investment land valued at $ Bonnie purchased the complex on November two years ago for $ million and has been operating the property as a sole proprietorship. The complex is subject to a nonrecourse debt of $ million. The land was purchased on August four years ago for $
In November and December of the prior year, Alan and Bonnie paid $ for expenses that qualify as organizational costs. During this time, they also paid $ for costs that meet the definition of startup expenses. The $ expense was paid for evenly by the two partners.
Immediately after formation, Alan and Bonnie agreed to admit Chuck Wobee to the partnership. In return for agreeing to manage the daily operations of the partnership, Chuck received a interest in capital and profits. His interest in the partnership vests immediately.
Operations and other activity during the current year
The partnership agreement states that Alan and Bonnie are to each receive cash draws of $ per month beginning on January 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 $ payable regardless of the profitability of the partnership.
In addition to the results of operations, Slumland Partners incurred the following transactions:
January Partnership invested $ in municipal bonds returning interest and $ in a money market account returning interest compute the interest using simple interest The interest earned in these accounts was transferred to the checking account. As a result, the investment balances remained unchanged at year end.
January Office space used as the headquarters for operations was rented. Rent for the first year of operations was $ Office furniture was purchased for $ and computers were purchased for $ The partnership elected to expense the cost of these items using
February The partnership purchased an apartment complex, Grease Trap Apartments, for $ million by paying $ cash and financing the remainder with a recourse loan. The partnership agreement was amended at this time to indicate that of the depreciation is to be specially allocated to Bonnie with the remaining of the depreciation to be shared amongst the partners according to their loss sharing percentages.
November The partnership distributed the land held for investment to Alan. At the time of the distribution, the land was valued at $ 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 Party planet Dumpster view Grease trap
Rental receipts $ $ $ $
Office rent
Utilities
Supplies
Property taxes
Maintenance and cleaning
Repairs
Interest on loans
Advertising
Charitable contributions
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
Also, $ of principal was paid on the loan on Party Planet Apartments, and $ 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 years.
Case requirements: See Excel Document to complete the case study
Formation of
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