Jerry and Matt Decide to Form a Business

question 60

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 Jerry's basis at the end of the second year if they organize the business as a partnership?

• A) $0
• B) $6,300
• C) $27,950
• D) $15,050
• E) $15,400

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Definitions:

Random Activities

Activities that occur without a definite aim, reason, or pattern.

Short-term Relationship

A relationship expected or designed to last for only a limited period of time.

Consultant

A professional who provides expert advice in a particular area.

Accounts Receivable

Money owed to a company by its customers for goods or services that have been delivered or used but not yet paid for.