Question

On January 20 of the current year, Zealand and Menandez form ZM LLC. Their contributions to the LLC are as follows: Adjusted Basis Fair Market Value From Zealand: Cash $82,000 $82,000 Accounts receivable $0 $214,000 Inventory $19,000 $26,000 From Menandez: Cash $201,000 $201,000 Temporary Investments $121,000 $121,000 Within 30 days of formation, ZM collects the receivables and sells the inventory for $26,000 cash. ZM realized the following income in the current year from these transactions: a. Ordinary income of $fill in the blank 2 from collecting cash basis accounts receivable. b. Ordinary income of $fill in the blank 4 from sale of inventory.

Answer 1

Answer:

Ordinary Income of $214,000 from collecting cash basis accounts receivable

Ordinary Income of $7,000 from sale of Inventory.

Explanation:

a. Adjusted basis of Accounts receivable = $0

Fair Market Value of Accounts Receivable = $214,000

Cash realized from Accounts Receivable = $214,000

Ordinary Income from collecting cash basis accounts receivable = $214,000

It is ordinary income since the Accounts receivable are taxed only after they are collected.

b. Adjusted basis of Inventory = $19,000

Fair Market Value of Inventory = $26,000

Cash realized from sale of Inventory = $26,000

Ordinary Income from sale of Inventory = Cash received from sale - Adjusted basis = $26,000 - $19,000  = $7,000

It is ordinary income since the Inventory only recognizes the adjusted basis i.e. the amount paid for inventory and any income recognized on sale of inventory is taxed accordingly.