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Dehna Partnership Problem Tax 361 - Take Home Problem Spring 2013 The Dehna Partnership is a calendar year cash basis limited partnership which was formed on 1/1/2012. The partnership is in the printing business. 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 940070070. 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 the building (acquired on 1/1/1995 as investment property) and its related mortgage. The building originally cost $132,000 and had a fair market value of $250,000 as of the date it was contributed to the partnership. There was a $130,000 balance on the qualified nonrecourse mortgage assumed by the partnership. The capital contribution of the building and its related mortgage was made on the date the partnership was formed. Kevin - 40% profit & loss ratio. Kevin contributed machinery valued at $80,000. The machine was acquired on 1/1/2007 at a cost of $120,000. The machine originally had a ten year life (5 years left @1/1/2012) and is depreciated on the straight-line method using a 10 year life at the rate of $12,000 of depreciation per year. Accumulated depreciation of $60,000 had been properly claimed from 1/1/2007 through 12/31/2011, so the machine had a net tax basis of $60,000 ($150,000 cost less $75,000 accumulated depreciation through 12/31/2011) 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. The partnership had the following activity in 2012: Income $2,700,000 Salaries $500,000 Payroll taxes $40,000 Repairs & maintenance $75,000 Guaranteed payments to Tara $30,000 Other expenses $337,000 Interest expense $6,000 California tax $800 Payroll tax late payment penalty $1,200 Meals & entertainment $25,000 Interest income $20,000 Charitable contribution $10,000 You will need to prepare the journal entries and the financial statements \"the books\" to record these, and then prepare the tax return. Journal entries which must be prepared include: A)You need to make a journal entry to record Tara's capital contribution as of 1/1/2012. B) You need to make a journal entry to record Kevin's capital contribution as of 1/1/2012. C. On 7/1/2012, the partnership purchased the property next door for $2,750,000. The $2,750,000 purchase was financed via a $750,000 RECOURSE LOAN from Union Bank and a $2,000,000 QUALIFIED NONRECOURSE FINANCING from Wells Fargo Bank. The recourse loan plus one year's interest at 10% is due in full on 12/31/2013, 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 being due on 9/30/2012. D. You need to record the depreciation expense on the 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 $12,000 ($120,000 original cost divided by 10 years). If the machine's depreciation had been based on it's $80,000 FMV, the depreciation based on FMV would have been $16,000 ($80,000 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. The partnership purchased additional equipment & furniture.It purchased $250,000 of fixtures, (cabinets etc - 7 year property), and made $415,000 of leasehold improvements. 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 initial rental property was SOLD on October 4th of the current year for $650,000 ($520,000 of cash AND the buyer assumed the $120,000 loan). The property increased in value dramatically during the year, and both partners agree the increase in value occurred during the current year. 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. Post the journal entries to the balance sheet and income statement 3. Prepare a partnership return for 2012 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)