• Complete Arlington Building Supply’s (ABS) 2010 Form 1065 and Schedule D. Also complete Jerry Johnson and Steve Stillwell’s Schedule K-1.
• The trial balance and tax return work papers are included in a separate file.
• Remember to review the trial balance for adjustments that may need to be made.
• If any information is missing, use reasonable assumptions to fill in the gaps.
• Form 4562 for depreciation is not required. Use the amount of tax depreciation and Section 179 expense provided in the income statement and the facts below to complete the appropriate lines on the first page and on Schedule K of the Form 1065.
• Form 4797 for the sale of trade or business property is not required. Use the amount of gain and loss from the sale of the truck and forklifts in the income statement and the information provided in the facts below to complete the appropriate lines on the first page and on Schedule K of the Form 1065.
• If any information is missing, use reasonable assumptions to fill in
• Forms required – 1065 (5 pages), 1065 K-1 Stillwell and Johnson, 1065 Schedule D and related Form 8949, Form 1065 B-1 lower section, Form 1125-A (COGS, you need to compute purchases, you have all the other lines, BI+P-EI=COGS).
• Supplement Schedules – 1065 Page 1 and the balance sheet, Schedule L will have lines that say “attach statement”, watch for these and make a statement with the detail description asked for that line, no additional detail statement is needed unless the form asks for it. Either Word or Excel work.
• Do your best on The Form 1065 Schedule B questions (page 2 and 3), but do check the boxes as best that you can from the text narrative and the guide sheet, hint most are “no” answers.
Be careful to fill in the informational questions that apply on page 1 (A-J) and page 2 (Q1) of Form 1065, and complete the name, and ID# on all forms and schedules, all necessary information has been provided to you or computed by you.
• On page 1 of Form 1065, be sure to include only items from Ordinary Business Income. Separately stated items are on the Schedule K (and K-1’s). The $49,000 of guaranteed payments will be in both places. Check figure for line 22 Ordinary Business Income is $144,987.
Balance Sheet Schedule L, line 16, record the $4,500 current portion of the mortgage in both beginning of the year and end of year liabilites.
• On January 1 of 2000, two enterprising men in the community, Jerry Johnson and Steve Stillwell, anticipated a boom in the local construction industry. They decided to sell their small businesses and pool their resources as general ¬partners in establishing a retail outlet for lumber and other building materials, including a complete line of specialty hardware for prefab houses. Their general partnership was officially formed under the name of Arlington Building Supplies and soon became a thriving business.
• ABS is located at 2174 Progress Ave., Arlington, Illinois 64888.
• ABS’s Employer Identification Number is 91-3697984
• ABS’s business activity is retail construction. Its business activity code is 444190.
• Both general partners are active in the management of ABS.
• Jerry Johnson’s Social Security number 500-23-4976. His address is 31 W. Oak Drive, Arlington, IL 64888.
• Steve Stillwell’s Social Security number 374-68-3842. His address is 947 E. Linder Street, Arlington, IL 64888.
For year ending December 31, 2010
Sales (on account) $410,000
Less: Sales returns -20,000
Cost of goods sold -150,000
Gross profit on sales $240,000
Salaries and wages (including
partners’ guaranteed payments) $79,000
Property Taxes 1,600
Payroll taxes 2,450
Depreciation and 179 expense 40,062
Bad debt expense 3,850
Office expense 1,800
Fire insurance 4,850 138,212
Net operating income $101,788
• ABS uses the accrual method of accounting and has a calendar year end.
• The partnership maintains its books according to the Section 704(b) regulations. Under this method of accounting, all book and tax numbers are equivalent except for life insurance premiums and tax exempt interest.
• The partners’ percentage ownership of original contributed capital is 30% for Johnson and 70% for Stillwell. They agree that profits and losses will be shared according to this same ratio. Any additional capital contributions must be made in these same ratios. The capital accounts may vary from these percentages from time to time as a result of withdrawals made by the partners, but in no event may the year-end capital account balances vary from the 30:70 ratio by more than 5 percent of total capital.
• For their services to the company, the partners will receive the following annual guaranteed payments:
o Johnson $28,000
o Stillwell $21,000
• Johnson is expected to devote all his time to the business, while Stillwell will ¬devote approximately 75 percent of his.
• Two forklifts were sold in September. The old lifts were purchased new four years ago. Two new forklifts were purchased on September 1, for $32,000 and the partnership intends to immediately expense them under ¬Section 179.
• The truck sold this year was purchased several years ago. $16,099 of the total gain from the sale of the truck was recaptured as ordinary income under IRC Section 1245.
• The partnership uses currently allowable tax depreciation methods for both ¬regular tax and book purposes. Assume alternative minimum tax depreciation equals regular tax depreciation.
• The partners decided to invest in a small tract of land with the intention of ¬selling it about a year later at a substantial profit. On September 30, they executed a $50,000 note with the bank to obtain the $70,000 cash purchase price. Interest on the 18 percent note is payable quarterly, and the principal is due in one year. The first interest payment of $2,250 was made on December 30.
• The note payable to the bank as well as the accounts payable are treated by the partnership as recourse debt. Assume the total recourse debt is allocated $28,776 to Jerry and $70,224 to Steve.
• Some years after the partnership was formed, a mortgage of $112,500 was ¬obtained on the land and warehouse from Commerce State Bank. Principal payments of $4,500 must be paid each December 31, along with eight percent interest on the outstanding balance. The holder of the note agreed therein to look only to the land and warehouse for his security in the event of default. ¬Because this mortgage is nonrecourse debt, it should be allocated among the partners according to their profit sharing ratios.
• The partnership values its inventory at lower of cost or market and uses the FIFO inventory method. Assume the rules of §263A do not apply to ABS.
• During the year, the partnership bought three hundred shares of ABC, Ltd.
for $6,100 on February 8, 2010. All the shares were sold for $6,650 on
April 2, 2010.
• Two hundred shares of XYZ Corporation were sold for $10,600 on September 13, 2010. The stock was purchased on December 1, 2003.
• The following dividends were received:
o XYZ (qualified) $400
o ABC, Ltd. (not qualified) 295
• The partnership received interest income from the following sources:
o Interest on Illinois municipal bonds $3,200
o Interest on savings 560
o Interest on accounts receivable 500
• The partnership donated $5,000 cash to the Red Cross.
• Life insurance policies on the lives of Johnson and Stillwell were purchased in the prior year. The partnership will pay all the premiums and is the beneficiary of the policy. The premiums for the current year were $3,000, and no cash surrender value exists for the first or second year of the policy.
• The partners withdrew the following cash amounts from the partnership during the year (in addition to their guaranteed payments):
o Johnson $20,000
o Stillwell $35,000
• The following are ABS’s book balance sheets as of December 31, 2009, and December 31, 2010:
Cash $ 70,467 $ 43,042
Accounts receivable 76,000 57,000
Inventories 60,000 50,000
Investment in municipal bonds 50,000 50,000
Investment in XYZ common stock 40,200 50,000
Truck $ 16,500
Less accumulated depreciation (13,649)
Machinery and equipment $ 66,000 $ 50,000
?Less accumulated depreciation (58,697) (34,376)
Building $120,000 $120,000
?Less accumulated depreciation (39,875) (36,798)
Land 90,000 20,000
TOTALS $474,095 $371,719
Liabilities and Capital
Accounts payable $ 49,000 $ 45,500
Notes payable 50,000 0
Mortgage payable 63,000 67,500
Capital: Jerry Johnson 94,553 82,040
??? Steve Stillwell 217,542 176,679
TOTALS $474,095 $371,719