Question

When a partnership is formed, noncash assets contributed by partners should be recorded:?

1) I. at their respective book values for income tax purposes.
2) II. at their respective fair values for financial accounting purposes.

Answer 1

Noncash assets contributed by partners in a partnership should be recorded at book value for tax purposes and at fair value for financial accounting purposes, to present a realistic assessment of the partnership's financial position.

Step-by-step explanation:

When a partnership is formed, noncash assets contributed by partners should be recorded:

1. At their respective book values for income tax purposes.
2. At their respective fair values for financial accounting purposes.

For income tax purposes, assets are typically recorded at book value to determine any gain or loss on disposition, and for financial reporting, assets should be recorded at fair value to provide a more accurate reflection of the company's financial position. This valuation aligns with the principle of fair value accounting, which states that assets and liabilities should be presented at fair values at the time of the transaction. The use of fair value provides a more realistic assessment of the economic value contributed to the partnership and enhances transparency for financial statement users.