Question

On January 6 of the current year Paxton and Jackson form PJ LLC. Their contributions to the LLC are as follows:

Adjusted Basis Fair Market Value

From Paxton:

Cash $680,000 $680,000

Temporary investments $118,000 $120,000

Accounts receivable $0 $540,000

Inventory $840,000 $880,000

From Jackson:

Cash $1,850,000 $1,850,000

Supplies $370,000 $370,0

Required:

1. Within 30 days of formation, PJ collects the receivables and sells the inventory for $60,000 cash. How much income does PJ recognize from these transactions, and what is its character?

Answer 1

ANSWER:

The income is ORDINARY INCOME

The total ordinary income amount is $642,000

Step-by-step explanation:

Income = adjusted basis - fair market

FROM PAXTON:

Cash:

$680,000 - $680,000 = $0

Temporal investment:

$120,000 - $118,000 = $2,000

Account receivable:

$540,000 - $0 = $540,000

Inventory:

$880,000 - $840,000 = $40,000

TOTAL INCOME FROM PAXTON = $582,000

FROM JACKSON:

Cash:

$1,850,000 - $1,850,000 = $0

Supplies:

$370,000 - $370,000 = $0

TOTAL INCOME FROM JACKSON = $0

PJ has received ORDINARY INCOME from;

Temporal investment = $2,000

Account receivable = $540,000

Inventory = $40,000 + $60,000 = $100,000

TOTAL ORDINARY INCOME = $642,000