Alicia and Barry Form the AB Partnership at the Start

question 62

Multiple Choice

Alicia and Barry form the AB Partnership at the start of the current year with a land contribution by Barry and a cash contribution by Alicia. Barry's contributed property is subject to a recourse mortgage assumed by the partnership. Barry has an 80% interest in AB's profits and losses. The land has been held by Barry for the past 6 years as an investment. It will be used by AB as an operating asset in its parking lot business. Which of the following statements is correct?

• A) Immediately after formation, Alicia's basis in the partnership equals the cash contributed by Alicia.
• B) Immediately after formation, Alicia's basis in the partnership equals the cash she contributed plus her share of the recourse debt contributed by Barry.
• C) Since the debt is recourse, the constructive liquidation scenario is not applicable for determining the allocation of debt to the partners.
• D) AB's basis in the land contributed by Barry equals Barry's basis in the land immediately before the contribution date, less the amount of the recourse debt assumed by the partnership.
• E) None of the above.

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Definitions:

Accounts Receivable

Liabilities of clients to a company for received goods or services awaiting payment.

Current Liabilities

Financial obligations of a business that are due and payable within one year, including accounts payable, short-term loans, and taxes payable.

Financial Statements

Documents that summarize an organization's financial activities, offering insights into its revenue, expenses, and equity.

Accounts Payable

Accounts Payable is the accounting term for the short-term liabilities owed by a company to its creditors or suppliers.