ExpertMedium1 markMultiple Choice
CPA · Question 55 · Area 3: Entity Tax Compliance
A partnership has a liability of $50,000. Partner A guarantees the debt. No other partner bears the economic risk of loss. How is this debt allocated?
A partnership has a liability of $50,000. Partner A guarantees the debt. No other partner bears the economic risk of loss. How is this debt allocated?
Answer options:
A.
100% to Partner A (Recourse).
B.
Allocated based on profit sharing ratios.
C.
Allocated based on loss sharing ratios.
D.
50% to Partner A.
How to approach this question
1. Identify Debt Type: Recourse vs Nonrecourse.<br/>2. Test: Who bears Economic Risk of Loss (EROL)?<br/>3. Fact: Partner A guarantees the debt. If partnership fails, A pays.<br/>4. Conclusion: It is Recourse debt allocated to A.
Full Answer
A.100% to Partner A (Recourse).✓ Correct
A
A liability is recourse to the extent that any partner or related person bears the economic risk of loss for that liability. Since Partner A guaranteed it, it is allocated to A.
Common mistakes
Treating guaranteed debt as nonrecourse.
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