Frank Zimmerman became a partner in Monahan Associates on January 1, 2017, with

Question

Frank Zimmerman became a partner in Monahan Associates on January 1, 2017, with a 10% interest in Monahan’s profits, losses, and capital. Monahan Associates manufactures sports equipment. Zimmerman does not materially participate in the partnership business. For the year ended December 31, 2017, Monahan had an operating loss of $150,000. In addition, Monahan earned interest of $12,000 on a temporary investment. Monahan has kept the principal temporarily invested while awaiting delivery of equipment that is presently on order. The principal will be used to pay for this equipment. Zimmerman’s passive loss for 2017 is

a) $0.

b) $13,800.

c) $15,000.

d) $16,200

Explanation / Answer

Frank Zimmerman become partner with 10% share

This 10% share is only in operating profit/loss

Monahan had an operating loss = $150000

Earned Interest $12000 on temporary Investment (This is not an operating Profit)

Frank Zimmerman 10% share only in operating profit/loss

Hence Zimmerman’s passive loss for 2017 is = $150000 * 10% = $15000

Option C is correct

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