Basil Company is owned equally by Bandi, Silvio, and Lia. At the beginning of th
ID: 2584173 • Letter: B
Question
Basil Company is owned equally by Bandi, Silvio, and Lia. At the beginning of the year, Basil Company had the following balance sheet: Fair Market Value Adjusted Basis (Tax) Cash $ 15,000 $ 15,000 Inventory $ 6,000 $ 8,000 Investment portfolio $ 39,000 $ 22,000 Land $ 90,000 $ 30,000 Total assets $ 150,000 $ 75,000 Debt (non-recourse) $ 30,000 $ 30,000 Equity $ 120,000 $ 45,000 Total liabilities & equity $ 150,000 $ 75,000 In the current year, Basil has interest income of $10,000; qualified dividend income of $12,000. It also sold all of the inventory for $5,500 and all of the investment for $42,500. No new assets were purchased. Requirements: For each of the following three situations determine:
1.The company’s overall book net income
2.The company’s ordinary income and separately stated items (tax only)!
3.The company’s ending balance sheet (book & tax)
4.The company’s tax liability (if any)
5.The amount of income, gain, or loss each owner will be reporting on his or her individual tax return
6.Each owner’s ending basis in the company
Situation 1: Basil Company is a partnership with all owners as general partners. The tax capital accounts are $10,000 (Bandi); $15,000 (Silvio); and $20,000 (Lia). At the end of year 1, Basil liquidates Silvio’s interest by distributing cash to him. The partnership has a section 754 election in effect.
Explanation / Answer
Dear Student
The Balance sheet of the Basil Company is represented as follows
Fair Market Value Adj Tax Basis
Cash 15000 15000
Inventory 6000 8000
Investment Portfolio 39000 22000
Land 90000 30000
Total Asset 150000 75000
Debt 30000 30000
Equity 120000 45000
Total Libility & Equity 150000 75000
Computation of Basil Company - Book - Net Income
Interest Income ............................................... 10000
Divident Income ................................................ 12000
Loss of Sale of Inventory ..................................(-) 2500
[ Book Value 8000- Sale Value 5500]
Capital Gain on Sale of Investment ......................20500
[ Sale Value 42500 - Book Value 22000]
Net Income ...................................................... 40000
Tax Liability [ as per IRS Tax Liabilty for Business Income upto 50000 is NIL]
c) Computation of Ordinary Income of Basil Company (Tax Only)
Interest Income ......................................10000
Dividend Income .....................................12000
Total Ordinary Income ............................. 22000
d) Basil Company's Ending Balance Sheet
Fair Market Value Tax Only
Cash - Opening Bal 15000
Interest Income 10000
Divident Income 12000
Sale of Invt 42500 79500 79500
Land 90000 30000
Total Asset 169500 109500
Debt 30000 30000
Equity (Balancing Fig) 139500 79500
Total Debt & Equity 169500 109500
e) Computation of Income /Gain/Loss for Each Owner of Basil Company
Assuming the Net Profit is distributed equally among the Patners (as they are equal shareholding)
Total Business Income .....................................40000
Share of Bandi (1/3) .........................................13333
Share of Silvio (1/3) ........................................13333
Share of Lia (1/3)....................................... 13333
Each partner need to report the above business income in their individual Tax return.
Thanks & Regards
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