Dirt to dust (DD) has partnered with All in Cash (AC), with DD serving as the ge
ID: 2595111 • Letter: D
Question
Dirt to dust (DD) has partnered with All in Cash (AC), with DD serving as the general partner and AC is the limited partner. AC is investing $500,000 and DD contributes no cash. The project obtains a loan for $2 million (10% interest only, nonrecourse) and purchases an apartment building for $2.5 million. Assume that year one performance results in net operating income from operations of $300,000. Debt service is $200,000 resulting in before tax cash flows of $100,000. Annual deprecation on the property is $250,000.
The partnership agreement stipulates that taxable income, loss and cash flow from operations are to be split 90% to AC and 10% to DD. On sale, taxable gains or losses are to be split 50-50 between the partners. Cash proceeds are distributed first to AC in an amount equal to his original investment less any cash distributions previously received, and then split 50-50 between both parties.
What are the capital account balances for DD and AC after one year?
Assuming the apartment building is sold at the end of year 1 for $3.1 million with no expenses, how much before tax cash is available from sale?
How much cash would be distributed to each partner on the sale of the property?
How much capital gain would be allocated to both partners on the sale of the property?
Calculate the capital account balances for both partners after the sale.
Explanation / Answer
Answer 1:
After first year, the capitalaccount balance are as under:
DD - $(25000)
AC -$ 275.000
Working:
DD invested nothing but AC invested $500,000. Income from operations, after deducting expenses is $ 100,000. This is further reduced by depreciaiton on building whichis $250,000. The net result is loss of $ 150,000. This is divided in the ration of 10% for DD and 90%for AC. As AC had a capital investment of $ 500,000, his balance will be reduced by 90% of $ 150,000 and will stand at $ 365,000. The capital account of DD will be in negative at $ 15,000 Then, the cash flows of $ 100,000 are distributed in the ration of 90 to AC and 10 to DD.Thus, accordingly the capital account balance is decreased by this amount..
Answer: 2,3,4
In case of sale of property for 3,100,000 after one year, the Profit and Loss statement will be as under:
Sale proceeds:3,100,000
Book value : 2,250,000 ( Cost of 2,500,000 minus depreciation of 250,000)
Gain : 850,000
Distribution in equal ratio means 425,000 for DD and 425,000 for AC
The distribution of cash will take place as under:
Cash received on sale ; 3,100,000
Debt repaid 2,000,000
Balance available 1,100,000
Paid to AC for his
investment first 500,000
Cash Balance available 600,000
Capital account balance of DD AC
As at opening (25,000) 275,000
Less: Cash paid for his investment (500,000)
Balance (25,000) (225,000)
Add : share of gain 425,000 425,000
Net Balance 400,000 200,000
Cash available distributed 400,000 200,000
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