Question

Jule owns property that is treated as a capital asset in her hands. She contributed a parcel (Basis $60,000; fair market value $58,000) to a real estate partnership, which will hold it as inventory. After three years, the partnership sells the land for $56,000. The partnership will recognize a $4,000 ordinary loss on the sale of the property. (True or False)

Answer 1

False the above recognition of loss of 4000 is incorrect.

Explanation for the above statement.

1. At the time of contribution of the property the fair value is 58000 but the basis of ownership is given to jule is 60000.

2. Even though the value of the property is valued on basis with the 60000 in books of accounts we should record it with 58000 of fair value because as per accounting standards a assets ri be valued with fair market value or book valu whicher is lower here the market value is lower so assets is valued at market value only and rest of 2000 as capital loss.

Entry for that is

Property a/c ........................Dr 58000

Capital loss a/c ...................Dr 2000

To jule capital a/c 60000

But the land was sold for 56000 then the partnership experienced a loss lo 2000 only but not the loss of 4000

So the entry is

Bank a/c ....................................Dr 56000

Profit and loss a/c............Dr 2000

To land a/c 58000

So here the recognition of 2000 ordinary loss is acceptable but the 4000 loss is not acceptable. The loss is transfered to profit and loss because the property is treated as inventory in the partnership.

In the above question. They recognized the 4000 loss it is not acceptable.

So the given statement is false.

I hope, all the above given points are useful and helpful to you.

Thank you.