Gain Recognition in Partnership Accounting
What is the scenario presented in the data?
The data presents a scenario where Straw contributes land with a basis of $145,000 and a fair market value of $435,000, and Rasp contributes cash of $435,000. They share profits and losses equally. Two years later, the land is sold for $725,000, leading to a gain recognition for Rasp.
How much gain must Rasp recognize from the sale of the land?
Rasp must recognize a gain of $145,000 from the sale of the land.
In the given scenario, Straw contributed land with a basis of $145,000 and a fair market value of $435,000, while Rasp contributed cash of $435,000. Since both partners share profits and losses equally, the gain from the sale of the land will also be shared equally.
The gain from the sale of the land is calculated by subtracting the basis from the selling price. In this case, the selling price is $725,000 and the basis is $435,000. Therefore, the gain is $725,000 - $435,000 = $290,000.
As Straw and Rasp share profits and losses equally, Rasp must recognize a gain of $145,000, which is half of the total gain. This ensures fair distribution of profits among the partners based on their contributions.
Gain recognition is a crucial aspect of partnership accounting, as it determines the allocation of profits and losses among partners. Understanding how gains and losses are recognized helps in maintaining accurate financial records and ensuring transparency in partnership dealings.