Problem:
Sales - Inventory A $ 60,000 Sales - Inventory B 58,000 COGS - Inventory A 35,000 COGS - Inventory B 40,000 Operating expenses 20,000 Depreciation 7,000 Short-term capital gain 1,000 Interest on business loan 500 Charles and Mary formed CM Partnership on January 1 of the current year. Charles contributed Inventory A with a $100,000 FMV and a $70,000 adjusted basis for a 40% interest, and Mary contributed $150,000 cash for a 60% interest. The partnership operates on a calendar year. The partnership used the cash to purchase equipment for $50,000, Inventory B for $80,000, and stock in ST Corporation for $5,000. The partnership used the remaining $15,000 for operating expenses and borrowed another $5,000 for operating expenses. During the year, the partnership sold one-half of Inventory A for $60,000 (tax basis $35,000), one-half of Inventory B for $58,000 (tax basis $40,000), and the ST stock for $6,000. The partnership claimed $7,000 of depreciation on the equipment for both tax and book purposes. Thus, for the year, the partnership incurred the following items: On December 31 of the current year, the partnership made a $1,000 principal payment on the loan and distributed $2,000 cash to Charles and $3,000 cash to