Jerry and Matt Decide to Form a Business

question 16

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 33% marginal tax bracket and Matt is in the 28% 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:

Total Disaster

A situation that has resulted in complete failure, often involving widespread damage or chaos.

Trumpet Valves

Mechanisms in a trumpet that, when operated, adjust the flow of air through the instrument's tubing to change the pitch.

Gilberto

A personal name, possibly of Portuguese or Italian origin, without a specific widely-recognized definition in a general context.

Trumpet

A brass musical instrument with a flared bell and a bright, penetrating tone, played by blowing air through closed lips into a mouthpiece.