The HMS Partnership, a Cash Method of Accounting Entity, Has

question 40

Essay

The HMS Partnership, a cash method of accounting entity, has the following balance sheet at December 31 of last year:
$$\begin{array} { | l | c | c | } \hline \text { Assets } & \text { Basis } & \text { Fair Market Value } \\\hline \text { Cash } & \$ 51,000 & \$ 51,000 \\\text { Accounts receivable } & \underline { 0 } & \underline { 210,000 } \\\text { Total } & \underline { \$ 51,000 } & \underline { \$ 261,000 } \\\hline\end{array}$$ $$\begin{array} { | l | c | c | } \hline { \text { Equities } } & \text { Basis } & \text { Fair Market Value } \\\hline \text { Notes payable } & \$ 30,000 & \$ 30,000 \\\text { Henry, capital } & 7,000 & 77,000 \\\text { Mark, capital } & 7,000 & 77,000 \\\text { Sam, capital } & \underline { 7,000 } & \underline { 77,000 } \\\text { Total } & \underline { \$ 51,000 } & \$ 261,000 \\\hline\end{array}$$ Sam, who has a one-third interest in profits, losses, and liabilities, sells his partnership interest to Beverly, for $77,000 cash on January 1 of this year. Sam's basis in his partnership interest (which, of course, includes a share of partnership liabilities) at the time of the sale was $17,000. In addition, Beverly assumes Sam's share of the partnership liabilities. What is the amount and character of the gain that Sam will recognize from this sale?

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Definitions:

Foreign Currency Firm Commitments

Agreements to execute a financial transaction in a foreign currency at a future date, at a predetermined rate or price.

Cash Flow Hedge

A form of hedge accounting that aims to reduce the exposure to variability in cash flows related to a specific risk.

Foreign Currency Option

A financial derivative that gives the holder the right, but not the obligation, to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date.

Fair Value

The cost at which one could sell an asset or assume a liability in a structured exchange with market participants on the valuation date.