C’s “owed” $100,000 by the equal AB partnership. C’s note indicates that the interest rate will vary depending on the performance of the partnership, and the note can be rolled over indefinitely as long as the partnership wishes it to be rolled over. The note is subordinated to any other liabilities of the partnership, except that it is secured by property with a current value of $120,000. A and B’s capital accounts total $2,000, and the terms of the note allow C to have a say in certain business decisions of the partnership. The partnership is in the real estate rental business, and its properties are rented virtually 100% of the time. At the current time, C’s debt is the only debt the partnership has. 

What factors indicate that the note is debt, and what indicates that it is equity? Which should it be classified as?

Answer rating: 100% (QA)

Factors indicating the Note as Debt A note may be labeled as debit when an instrument contains a written unconditional promise to pay the sum of money ... View the full answer