TAX 9863 Lecture Notes - Lecture 42: Capital Account

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14 Feb 2020
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Example #1: A and B form a partnership; each contributes $400. They will share all
profits and losses equally. AB’s initial balance sheet is as follows:
Assets Liabilities & Capital
Book
Cash $800
Capital Accounts
Book
A $400
B 400
$800
Initial Transactions: The partnership immediately buys an apartment building for
$1,000, paying $200 cash and giving an $800 mortgage for the balance. AB also invests
some of its excess cash in stock ($150) and tax exempt bonds ($150). After these
acquisitions, AB’s balance sheet would look as follows:
Assets Liabilities & Capital
Book
Cash $300
Stock 150 Mortgage $800
TE Bond 150
Apt. 1,000
$1,600 Capital Accounts
Book
A $400
B 400
$800
Operations: AB takes book depr. Over 20 years using S/L method. Dividend income of $10, tax
exempt income of $15 and net rental income from building of $35 (rents of $85-depr of $50) for
a total of $60 income from which A and B share equally. During the year, the stock went up in
value to $200. There were no distributions
Assets Liabilities & Capital
Book
Cash $410
Stock $150 Mortgage $800
Bonds $150
Bldg 950
1660
Capital Accounts
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