 Hello and welcome to this session in which we would look at a CPA exam simulation or an exercise that help us understand contributing property to a partnership. Adam and Noah formed the partnership of A&A and Enterprises January 1st of the current year. Adam and Noah are equal partners. Adam contributed $80,000 of cash, land with a fair market value of $110,000, adjusted basis of $95,000. Noah contributed an equipment with a fair value of $190,000, adjusted basis of $40,000. Noah used this equipment in his business when he was a sole proprietorship before this partnership is formed. We have six questions to answer. Let's go ahead and get started. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today. The first question, what is the gain or loss realized? What does that mean? It means if Noah and Adam sold those assets, what is the gain realized? What is the gain realized? What actually happened? And what actually happened here? Noah gave up his piece of equipment. Adam gave up his land. When you give up something, well, there are consequences to that. Well, let's assume you sold it. If you sold it, if Adam sold it, he would have sold it for 110, adjusted basis of 95. Adam will have a realized gain of 15. That's the realized gain. This is what actually was realized. Noah had a fair value of 190,000 with a basis of 40. Noah would have had a gain of 150. That's the gain that's realized. So it's not a loss. It's a gain, and that's the amount that's realized. And hopefully we know this. Consideration received minus the basis. The second question reads, how much of the gain or the loss, which is now we know it's a gain, will be recognized as a result of this transaction? What happened here is we contributed our asset to a partnership, to form a partnership. What do we need to know about this? Well, what we need to know is we ignore the fair market value. We use the adjusted basis of the property contributed. So how much is the gain recognized by Adam? 0. None. How about Noah? 0. Make sure on the CPA exam, if you have a CPA exam simulation to enter 0, if that's needed or none. How about the partnership itself? What would they do if they receive those asset? No gain, no loss realized. What are the tax basis and their partnership interests? What is the tax basis in Adam and Noah? I just told you, the adjusted basis of the property contributed. For Adam, Adam contributed cash of 80,000, adjusted basis of land of 95, total of 175. However, Noah contributed an equipment with an adjusted basis of 40. Now you want to make sure things make sense in what sense. Remember what we said at the beginning, Adam and Noah are equal partners. It means they are 50% partners. When they are 50% partners, it means they equally contributed fair market value to this partnership. Did they really contributed this? Well, let's think about it. Noah contributed 190,000 of fair market value. Adam contributed 80,000 of cash, that's the fair market value of the cash, and a land with 110,000. Therefore, from a capital interest, yes, 50%, 50%. I just want to make sure you understand that indeed they're equal partners. What basis would the partnership take and the asset received? I just told you, they will take the basis of the asset contributed, 80,000 cash, 95,000 for the land, 40,000 for the equipment, which will be 215. And guess what? These are called the inside basis, which is the basis of the asset inside the partnership, and these are the outside basis, the 175 and the 140. Are there any differences? At this point, there is none. Sometimes differences could arise, but there's no differences here between the inside and outside basis. The last question is how will the partnership depreciate any asset received from the partners? What do we need to know about this question? What we need to know is this? When we contribute asset, capital asset or section 1231, depreciable asset, the adjusted basis transfer, we already know this, the holding period transfer means how long we had this asset. Also the depreciation method, remember Noah was using this equipment for in his business? The same depreciation method that Noah was using will be used in the partnership. And I hope this exercise basically summarizes some basic concept in partnership partnership formation. Now bear in mind, what we did not involve here is the concept of liabilities. So we did not assume there are any liabilities involved, which we'll see. We're going to be adding more to this onion in the next lesson. What should you do now? Go to Farhat Lectures, look at additional resources, multiple choice, through false lectures that's going to help you understand these concepts. Good luck, study hard and invest in yourself.