At-Risk and Passive Loss Limitations: At thebeginning of Year 1, Ed and Fran each contributed $1,000 cash to EFPartnership as equal partners. The partnership immediatley borrowed$98,000 on a nonrecourse basis and used the contributed cash andloan proceeds to purchase equipment costing $100,000. Thepartnership leases out the equipment on a five year lease for$10,000 per year. Over the five year period, the partnership makesthe following principal and interest payments on the loan:
Year Principal Interest 1 $3,000 $7,000 2 $3,500 $6,500 3 $3,500 $6,500 4 $4,000 $6,000 5 $4,000 $6,000
Assume the partnership depreciates the equipment according tothe following hypothetical schedule:
Year Depreciation 1 $40,000 2 $25,000 3 $15,000 4 $8,000 5 $8,000 6 $4,000
At the beginning of year 6, the partnership sells the equipmentfor $82,000. The partnership claims the last $4,000 of thedepreciation at the beginning of year 6 as an expense, so theequipment has a zero basis when sold. At the beginning of year 6,the partnership also pays off the $80,000 loan balance anddistributes any remaining cash to Ed and Fran. Assume that eachpartner has a 33% ordinary tax rate and an 18.8% capital gains taxrate (including the 3.8% tax on net investment income)
A) Determine the partnership's gain/loss for each of the fiveyears and the beginning of the sixth year.
B) Assume that depreciation recapture applies but that theat-risk and passive activity loss rules do not apply. Using theresults from Part A and a 7% discount rate, determine the presentvalue of tax savings for both partners combined over the five yearperiod including the beginning of the sixth year. Why do these taxsavings occue?
C) Now assume the at-risk and passive activity loss rules doapply. Determine what the partners recognize over the five yearperiod including the beginning of the sixth year. Do the partnershave any tax savings in this situation. Why or why not? D) Providea schedule analyzing each partner's outside basis over the fiveyear period including the sixth year
At-Risk and Passive Loss Limitations: At thebeginning of Year 1, Ed and Fran each contributed $1,000 cash to EFPartnership as equal partners. The partnership immediatley borrowed$98,000 on a nonrecourse basis and used the contributed cash andloan proceeds to purchase equipment costing $100,000. Thepartnership leases out the equipment on a five year lease for$10,000 per year. Over the five year period, the partnership makesthe following principal and interest payments on the loan:
| Year | Principal | Interest |
| 1 | $3,000 | $7,000 |
| 2 | $3,500 | $6,500 |
| 3 | $3,500 | $6,500 |
| 4 | $4,000 | $6,000 |
| 5 | $4,000 | $6,000 |
Assume the partnership depreciates the equipment according tothe following hypothetical schedule:
| Year | Depreciation |
| 1 | $40,000 |
| 2 | $25,000 |
| 3 | $15,000 |
| 4 | $8,000 |
| 5 | $8,000 |
| 6 | $4,000 |
At the beginning of year 6, the partnership sells the equipmentfor $82,000. The partnership claims the last $4,000 of thedepreciation at the beginning of year 6 as an expense, so theequipment has a zero basis when sold. At the beginning of year 6,the partnership also pays off the $80,000 loan balance anddistributes any remaining cash to Ed and Fran. Assume that eachpartner has a 33% ordinary tax rate and an 18.8% capital gains taxrate (including the 3.8% tax on net investment income)
A) Determine the partnership's gain/loss for each of the fiveyears and the beginning of the sixth year.
B) Assume that depreciation recapture applies but that theat-risk and passive activity loss rules do not apply. Using theresults from Part A and a 7% discount rate, determine the presentvalue of tax savings for both partners combined over the five yearperiod including the beginning of the sixth year. Why do these taxsavings occue?
C) Now assume the at-risk and passive activity loss rules doapply. Determine what the partners recognize over the five yearperiod including the beginning of the sixth year. Do the partnershave any tax savings in this situation. Why or why not? D) Providea schedule analyzing each partner's outside basis over the fiveyear period including the sixth year
Related questions
Required:
1. Correct the recorded activity for Android for Life during July on the attached spreadsheet
2. Correct the balance sheet and income statement for Android for Life in July 2015 on the attached spreadsheet.
3. Is the large decline in cash a concern?
Android for Life Inc.
On July 1, 2015, Andy incorporated her business under the name Android for Life, Inc. Listed below are various transactions that occurred during the remainder of the year:
(a) On July 1, Andy purchased all of Android for Life common stock for $100,000 cash.
(b) On July 1, Android for Life paid $3,000 to an attorney to prepare and file incorporation documents with the State of Texas.
(c) On July 2, Android for Life borrowed $100,000 from a local bank. The bank note required payment of principal in four annual installments of $25,000 beginning on July 1, 2016. In addition, the note specified interest payments of 6%, with the first payment due on July 1, 2016.
(d) On July 3, Android for Life signed a five-year lease on a building to be used as the veterinary clinic. The lease required a payment of $10,000 per month , payable on the first day of each month. Android for Life paid the amount for July on the date the lease was signed.
(e) On July 5, Android for Life paid $150,000 for medical equipment, office furniture, and other equipment.
(f) On July 6, Android for Life purchased various inventory items for $8,500 cash.
(g) Also on July 6, Android for Life purchased $500 worth of office supplies for cash.
(h) On July 28, Android for Life paid employees wages of $8,000 (which included Andyâs salary of $6,000).
(i) During July, Android for Life received $30,000 from clients for office visits and sales of merchandise (food, clothes, etc.).
A review of Android for Life records at July 31, 2015, revealed the following:
(j) Clients still owed Android for Life $3,500 for services performed during July but not yet billed. These amounts are expected to be billed and collected in August.
(k) At the end of July, a physical count of inventory revealed that $1,000 of inventory was still on-hand.
(l) At the end of July, a physical count of office supplies revealed that $100 of supplies were still on-hand.
(m) Depreciation on the equipment for July was estimated to be $1,250.
(n) Interest needs to be recorded on the note payable.
| Assets | Liabilities | Stockholders' Equity | ||||||||||||
| Accounts | Office | Property, Plant | Intangible | Accumulated | Notes | Interest | Common | Retained | ||||||
| Transaction | Cash | Receivable | Inventory | Supplies | & Equipment | Assets | Depreciation | = | Payable | Payable | Stock | Earnings | ||
| purchase of Common Stock | (100,000) | (100,000) | ||||||||||||
| Payment for Articles of Incorporation | (3,000) | 3,000 | ||||||||||||
| Note / Loan (interest expense on income statement?) | 100,000 | 100,000 | ||||||||||||
| Long-term Lease (show on income statement $10k?) | (10,000) | (10,000) | ||||||||||||
| Long-term Equipment | (150,000) | 150,000 | ||||||||||||
| Inventory Items | (8,500) | 8,500 | ||||||||||||
| Office Supplies | (500) | 500 | ||||||||||||
| Wages | (8,000) | (8,000) | ||||||||||||
| Office Visits/ Merchandise | 30,000 | 30,000 | ||||||||||||
| Services Performed | 3,500 | 3,500 | ||||||||||||
| Inventory Used (income statement expense?) | 7,500 | (7,500) | ||||||||||||
| Office Supplies Used (income statement expense?) | (400) | (400) | ||||||||||||
| Depreciation on Equipment (income statement expense?) | (1,250) | (1,250) | ||||||||||||
| Interest Expense (income statement expense?) | 6,000 | (6,000) | ||||||||||||
| Totals | (142,500) | 3,500 | 1,000 | 100 | 150,000 | 3,000 | (1,250) | 100,000 | 6,000 | (100,000) | 7,850 | |||
| Android Inc. | ||
| Income Statement | ||
| For the month ended July 31st, 2015 | ||
| Revenues | ||
| Sales and Revenues | 33,500 | |
| Less: Cost of goods Sold | (7,500) | |
| Gross Profit | 26,000 | |
| Expenses | ||
| Organizational Expenses | 3,000 | |
| Salaries Expense | 8,000 | |
| Office Supplies Expense | 400 | |
| Depreciation Expense | 1,250 | |
| Interest Expense | 500 | |
| TOTAL EXPENSE | 13,150 | |
| NET INCOME | 12,850 | |
| Android Inc. | ||
| Balance Sheet | ||
| As at July 31st, 2015 | ||
| Assets: | ||
| Current Assets | ||
| Cash | 60,000 | |
| Accounts Receivable | 3,500 | |
| Inventory | 1,000 | |
| Office Supplies | 100 | |
| Total Current Assets | 64,600 | |
| Plant Property and Equipment | ||
| Plant Property and Equipment | 150,000 | |
| Less: Accumulated Depreciation | (1,250) | 148,750 |
| TOTAL ASSETS | 213,350 | |
| LIABILITIES | ||
| Notes Paybles | 100,000 | |
| Interest Payale | 500 | |
| TOTAL LIABILITIES | 100,500 | |
| Shareholder's Equity | ||
| Common Stock | 100,000 | |
| Retained Earnings | 12,850 | |
| TOTAL Shareholder's Equity | 112,850 | |
| TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY | 213,350 | |
