Daniela is a 25percent partner in the JRD Partnership. On January 1, JRD makes a proportionate distribution of $16,000 cash, inventory with a $16,000 fair value (inside basis $8,000), and accounts receivable with a fair value of $8,000 (inside basis of $0)to Daniela. JRD has no liabilities at the date of the distribution. Daniela's basis in her JRD Partnership interest is $21,000. What is Daniela's basis in the distributed inventory and accounts receivable?
A)$8,000 inventory, $0 accounts receivable.
B)$6,000 inventory, $1,000 accounts receivable.
C)$5,000 inventory, $0 accounts receivable.
D)$16,000 inventory, $8,000 accounts receivable.

Question

Quizplus · Accepted Answer

Since Daniela's basis in her partnership interest is $21,000 and she received a proportionate distribution, the total fair value of the distributed assets is $40,000 ($16,000 cash + $16,000 inventory + $8,000 accounts receivable).

To determine Daniela's basis in the distributed assets, we need to allocate her basis in the partnership interest among the distributed assets based on their fair values.

The inventory has a fair value of $16,000 and an inside basis of $8,000. This means that the partnership had already recognized $8,000 of gain on the inventory prior to the distribution. Therefore, when the inventory is distributed to Daniela, her basis in the inventory will be equal to its fair value of $16,000 minus the recognized gain of $8,000, or $8,000.

The accounts receivable have a fair value of $8,000 and an inside basis of $0. This means that the partnership had not yet recognized any gain or loss on the accounts receivable. Therefore, when the accounts receivable are distributed to Daniela, her basis in the accounts receivable will be equal to their fair value of $8,000.

Overall, Daniela's basis in the distributed inventory and accounts receivable is $5,000 ($8,000 for inventory minus $3,000 recognized gain, and $8,000 for accounts receivable). Therefore, the correct answer is choice C.

Daniela Is a 25percent Partner in the JRD Partnership