Reference no: EM133239717

A and B are partners in a newly-formed general partnership. They will share profits and losses equally, though their capital accounts may not always be equal. The partnership will maintain capital accounts as required by tax law. The partners will share recourse liabilities equally.

A contributes that following to the partnership:

$50 cash and land, basis $50, fair market value $100, subject to a recourse mortgage in the amount of $100 which the partnership assumes

B contributes the following to the partnership:

His $50 promissory note payable in five years and bearing interest at the rate prescribed by the IRS, plus a promissory note from X to B having a face value of $50 plus equipment, basis $50, fair market value $100.

1. Compute capital accounts: Compute a balance sheet for the partnership at formation including the capital accounts for each partner.

2. Compute outside basis: Compute the outside basis of each partner immediately after the contributions described above.

3. Changes in capital accounts: During the second year of operation of the partnership, the partnership receives $100 in bond interest that is tax exempt. How does the receipt of this income change the balance sheet of the partnership including the capital accounts of the partners?

4. Changes in capital accounts: During the second year of operation of the partnership, the partnership borrowed $100 from a bank. How does this liability change the balance sheet of the partnership including the capital accounts of the partners?

5. Change in capital counts: During the second year of operation of the partnership, the partnership pays the $100 mortgage on the land contributed to the partnership by A. How does this payment change the balance sheet of the partnership including the capital accounts of the partners?