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NNADVOKAT [17]
3 years ago
15

Jackson is a 30 percent partner in the JJM Partnership when he sells his entire interest to Rhonda for $112,000 cash. At the tim

e of the sale, Jackson's basis in JJM is $64,000. JJM does not have any debt or hot assets. What is Jackson's gain or loss on the sale of his interest?
A. $48,000 ordinary income.B. $24,000 capital gain and $24,000 ordinary income.C. $48,000 capital gain.D. Gain or loss cannot be determined.
Business
1 answer:
mart [117]3 years ago
3 0

Answer: C. $48,000 capital gain

Explanation:

To calculate the Gain or loss on the sale of Jackson's interest we will subtract his adjusted basis from the sale of his entire interest in the following manner,

Gain(loss) on sale of interest = Amount realised - Adjusted basis in partnership

= 112,000 - 64,000

= 48,000

$48,000 will be his Gain on the sale of his interest. It will also be considered CAPITAL as he does not have Hot assets like inventory just equity.

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X-treme Vitamin Company is considering two investments, both of which cost $10,000. The cash flows are as follows:Year Project A
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A) Project A = 0.83 year

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C) Answer B

Explanation:

Requirement A

We know,

Payback period = Last year with negative cumulative cash flows + (Absolute value of last year's cumulative cash flow ÷ Cash flow of the following year's negative cumulative cash flow)

Or, Payback period = A + ( B ÷ C)

                             Project A                                       Project B

Year   Cash Flow   Cumulative Cash Flow    Cash Flow  Cumulative Cash Flow

0 (A)   -$10,000      -$10,000 (B)                     -$10,000        -$10,000 (B)

1           $12,000 (C)      2,000                           $10,000(C)                 0

2              8,000         10,000                               6,000             6,000

3              6,000         16,000                              16,000           22,000

Payback period for project A = 0 + ($10,000 ÷ 12,000) = 0 + 0.833 = 0.83 year

Payback period for project B = 0 + ($10,000 ÷ 10,000) = 0 + 1 = 1 year

X-treme Vitamin Company should choose project A because it can return the investment earlier than project B.

Requirement B

We can use excel to find the Net Present Value for both the projects with a cost of capital of 10%.

The following image shows the NPV for project A and B.

From the calculation of NPV, X-treme Vitamin Company should choose project B as that project yields more present cash flows.

Requirement C

A firm should generally have more confidence in answer b because money can produce more logical sense than a year. Yes, it is easy to understand how many years a company will need to get back its cash flow. Still, the present value of cash flows provides a more specific evaluation of how to utilize the initial investment.

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What fact or facts support a situation where trade is advantageous?

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