Tatiana partnership
The Tatiana Partnership is a calendar year, cash basis limited partnership which was formed on 1 January 2014. The partnership is in the business of training attack dogs and cats (business code 541990). 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 94-0070070.
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:
Tyr Slesnick (SSN; 007-06-1991), the general partner
Arekay Mitchell (SSN: 006-01-1985), the limited partner.
Tyr – 60% profit and loss ratio. Tyr contributed a parcel of land (acquired on 1/1/1995 as investment property) and its related mortgage. The land originally cost $200,000 and had a fair market value of $300,000 as of the date it was contributed to the partnership. There was a $180,000 balance on the qualified nonrecourse mortgage assumed by the partnership. The land is known as “Whitaker Acres”. The capital contribution of the land and its related mortgage was made on the date the partnership was formed. The land was used by the Tatiana Partnership as a location to train the dogs.
Arekay – 40% profit and loss ratio. Arekay contributed a dog training machine valued at $80,000. The dog training machine was acquired on 1/1/2009 at a cost of $120,000. The machine originally had a ten year life (5 years left@ 1/1/2014) 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 ($120,000 cost less $60,000 accumulated depreciation through 12/31/2013) 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.
A. You need to make a journal entry to record Tyr’s capital contribution of the land subject ot the mortgage as of 1/1/2014.
B. You need to make a journal entry to record Arekay’s capital contribution of the dog training machine as of 1/1/2014.
C. On 12/31/2014 (the last day of the year), the partnership purchases a new piece of land (Darien Acres) for $4,500,000. The $4,500,000 purchase was 100% financed via a $1,000,000 RECORSE LOAN from Union Bank and a $3,500,000 QUALIFIED NONRECOURSE FINANCING from Wells Fargo bank. The recourse loan plus one year’s interest at 10% is due in full on 12/31/2014, and no interest is payable until maturity. The qualified nonrecourse loan requires quarterly interest payments (at an 8% annual rate) with the first quarterly interest payment of $70,000 not being due until 3/31/2015 (i.e., next year). This land will be used as a larger site on which to train the dogs and cats – i.e., it’ll be used as business land.
D. You need to record the depreciation expense on the dog training 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 business purchased $920,000 of additional training equipment. This equipment was purchased on the day the partnership was formed, and it has been fully paid for as of the end of the year. 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. The property was purchased on 1/2/2013.
F. The property contributed by Tyr was known as “Whitaker Acres”. This property was SOLD on July 4th of the current year for $600,000 ($420,000 of cash is shown in a separate account, but no entry has been made to record the sale, so you’ll need to make the journal entry necessary to record the sale and decide how to allocate the gain between the two partners.
REQUIRED:
1. Prepare journal entries to record the events listed in “A” through “F” above. Label the entries “A” through “F”>
2. Post the journal entries to the cash activity and prepare a “working trial balance”.