Assume Roland, Korger, and Berger form RKB Rentals, a rental real estate partnership by contributing the following properties:

Roland

Property

Value at Contribution

Adjusted Basis

Land

$120,000

$90,000

Building

$800,000

$600,000

Cash

$100,000

$100,000

Total

1,020,000

790,000

Korger

Property

Value at Contribution

Adjusted Basis

Land

$140,000

$120,000

Building

$880,000

$800,000

Total

1,020,000

920,000

Berger

Property

Value at Contribution

Adjusted Basis

Cash

$800,000

$800,000

The partnership purchases the following property after formation:

Property

Value at Contribution

Adjusted Basis

Land

$200,000

$200,000

Building

$1,000,020

$1,000,020

The property is purchased with $600,020 of cash and a $600,000 recourse mortgage.

The partnership will split profits and losses as follows: 35% each to Roland and Korger and 30% to Berger.Loans will also be allocated by those ratios.

In addition, Roland will be entitled to a guaranteed payment of $10,000 and Berger will be entitled to a guaranteed payment of $5,000.

First Year Transactions:

The partnership has the following cash transactions during the first year:

Cash Revenues

216000

Cash Expenses

52000

Guaranteed payments

15000

Loan principal paid

10000

Additional Cash Distributions to Partners: $35,000 is distributed each to Roland and Korger and $30,000 is distributed to Berger.

Depreciation Expense: Assume for the sake of simplicity that all properties are depreciated straight-line with no salvage value over 30 full years but the contributed properties had been depreciated for 5 years prior to contribution and have only 25 years left on their depreciation schedules.

REQUIRED:

1)Set up the initial partnership balance sheet (at formation) as shown in the Session 1 handouts.

2) Complete the ending partnership balance sheet after Year 1 as updated by the Year 1 transactions.Of course, you will have to figure book and taxable income and other changes to capital accounts (book and tax) and outside basis.Make sure to follow the requirements under Section 704(c) regarding differential allocation of depreciation among partners when there is contributed property with built-in gain.