Jerry and Matt Decide to Form a Business

question 87

Multiple Choice

Jerry and Matt decide to form a business. Jerry will contribute $4,200 for a 35% interest and Matt will contribute $7,800 for a 65% interest. The business will take out a $25,000 loan to cover the balance of their working capital needs. They expect that the business will have a loss of $38,000 for the first year. In the second year, the business will have a profit of $52,000 and it will distribute $5,200 to Matt and $2,800 to Jerry. Jerry is in the 32% marginal tax bracket and Matt is in the 24% marginal tax bracket. Their marginal tax brackets will not change as a result of profit or loss from this business. What is Matt's basis at the end of the second year if they organize the business as a partnership?

• A) $0
• B) $11,700
• C) $27,950
• D) $28,600
• E) $33,800

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Definitions:

Blood PH

Blood pH is a measure of the acidity or alkalinity of blood, with a normal range for human blood typically being between 7.35 and 7.45, indicating a slightly alkaline condition.

Carbon Dioxide

A gas without color or smell, created from burning carbon and organic compounds, and emitted during breathing, which is taken in by plants during the process of photosynthesis.

Arsenic

Referred to as a semimetallic chemical element, recognized for its role in historical poisoning cases, it has applications in electronics and wood preservation.

Lethal Dosage

The amount of a substance required to cause death in a living organism, often abbreviated as LD.