The balance sheet (with fair market values displayed) is for a three-person service partnership with three equal
Question:
The balance sheet (with fair market values displayed) is for a three-person service partnership with three equal partners. Thornton enters into a retirement agreement with the partnership that provides for payments of $33,500 annually for 4 years and a liability release of $6,000 at the end of the payout period. The partnership agreement does not provide for property payments to a partner for the partner’s share of goodwill.
Value | Tax Basis | |
Cash | 240000 | 240000 |
Unrealized Receivables | 60000 | 0 |
Unstated Goodwill | 60000 | 0 |
Other Property | 60000 | 45000 |
Total | 420000 | 285000 |
Liabilities | 18000 | |
Capital | Value | Tax Basis |
Norton | 134000 | 95000 |
Horton | 134000 | 95000 |
Thornton | 134000 | 95000 |
Suppose the partnership made a different retirement payout agreement with Thornton. Under this agreement, the partnership agreed to pay Thornton $90,000 in cash and $6,000 of liability release in the first year, and 10% of the partnership profits for the following three years. SELECT ALL OF THE TRUE STATEMENTS FROM THE LIST BELOW.
1 | Thornton would recognize $1,000 of capital gain in the first year |
2 | All payments after the first year would represent ordinary income to Thornton |
3 | The payments to Thornton would represent a guaranteed payment |
4 | The partnership would receive a deduction from ordinary income for all the payments to Thornton |
5 | Thornton is considered to continue as a partner until the Section 736(a) payments are completed |
Advanced Accounting
ISBN: 978-0538480284
11th edition
Authors: Paul M. Fischer, William J. Tayler, Rita H. Cheng