Scenario is: My partnership bought property w/ existing business. Property
consist of a house, land, furniture & fixtures to run the business,
including the existing clients. Property will be used 100% for the business,
we will get my own business permit & licenses. Cost of property bought is
$800K, $700K was financed, we put in $100K as down payment. Business has a
guaranteed gross income of at least $20K a month.
Now here's the scenario that is confusing me. Previous owner & we went into
agreement that we will pay him extra $50K for the business he lost. It is
payable in 12 months. We am using Cash basis of accounting method.
1. How would I account the $50k when I set-up my book? Is it long-term
liability? Organization cost? or Start-up cost? Will it reduce our beginning
capital or equity? Should it become part of rhe property's purchase cost?
Please give me the debit/credit entry.
2. How would I account the monthly payment for the $50K. Is it an expense
against the long-term liability? Decrease in Asset if it is going to be part
of purchase cost?
2. At the end of the year, lets say 6 months after. Out of $50K, we already
paid $25K and we still owe $25K. And its time to file the partnerships tax
return. Where is my amortization cost will be based? On the $50K or on the
$25K? Can I just expensed the $25K and amortized $25K and just recapture the
expensed amount on next years Income Tax?
This is really confusing. Pleas help me understand what is going on in our
balance sheet & income statement.