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

question 32

Essay

The HMS Partnership, a cash method of accounting entity, has the following balance sheet at December 31 of last year: $$\begin{array} { | l | r | c | } \hline { \text { Assets } } & \text { Basis } & \text { Fair Market Value } \\\hline \text { Cash } & \$ 51,000 & \$ 51,000 \\\text { Accounts receivable } & { 0 }& { 210,000 } \\ \text { Total } & \underline { \$ 51,000 } & \$ 261,000 \\\hline\end{array}$$
$\begin{array}{|l|l|l|}\hline\text { Equities } & \text { Basis } & \text { Fair Market Value } \\\hline \text { Notes payable } & \$ 30,000 & \$ 30,000 \\\text { Henry, capital } & 7,000 & 77,000 \\\text { Mark, capital } & 7,000 & 77,000 \\\text { Sam, capital } & \underline{\mathbf{7 , 0 0 0}} & \underline{\mathbf{7 7 , 0 0 0}} \\\text { Total } &\$ 51,000 & \underline{\$ 261,000}\\\hline\end{array}$ 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:

Departmental Overhead Rates

The allocation of indirect costs to specific departments based on relevant activity bases, to accurately reflect the costs incurred by each department.

Overhead Costs

Indirect costs not directly tied to a specific job, product, or service but necessary for the business operations.

Process Involved

The series of actions or steps taken in order to achieve a particular end, typically in the context of manufacturing or business operations.

Activity-based Costing

A method of cost accounting that identifies specific activities related to the production of goods and services, assigning costs based on actual consumption of resources.