Ed's Adjusted Basis in His Partnership Interest at the Beginning

question 91

Multiple Choice

Ed's adjusted basis in his partnership interest at the beginning of the tax year is $35,000. The partnership has operating income of $20,000 for the current year. Ed is a 50% partner, and he receives a current distribution of $40,000 cash this year. What is (are) the tax effect of these events?
I.Ed recognizes $10,000 of ordinary income from the partnership for the year.
II.Ed recognizes $40,000 of ordinary income due to the distribution.
III.Ed's adjusted basis in his partnership interest at the close of the tax year is zero.
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• A)Statements II and III are correct.
• B)Only statement I is correct.
• C)Statements I, II, and III are correct.
• D)Only statement III is correct.
• E)Statements I and III are correct.

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Definitions:

Conversion Cost

The sum of direct labor and manufacturing overhead costs that are required to transform raw materials into finished goods.

Depreciation

The methodical distribution of the expense of a physical asset throughout its expected lifespan.

Oven

An enclosed compartment, usually part of a stove, used for cooking and baking.

Factory Supplies

Items used in the manufacturing process that are not directly part of the final product, including cleaning supplies, tools, and machinery maintenance materials.