9-60: Tax Return Problem. Phil Smith and Kate Jones formed the P&K General Partnership on March 1, 2017, to provide computer consulting services. Partnership profits and losses are allocated 60% to Phil and 40% to Kate. The business code and employer identification numbers are 7370 and 24-3897625, respectively. The business office is located at 3010 East Apple Street, Atlanta, Georgia 30304. Phil and Kate live nearby at 1521 South Elm Street and 3315 East Apple Street, respectively. Their Social Security numbers are 403-16-5110 for Phil and 518-72-9147 for Kate.

The calendar year, cash basis partnership's December 31, 2021, balance sheet and December 31, 2022, trial balance (both prepared for tax purposes) contain the following information:

Balance Sheet 12/31/2021Trial Balance 12/31/2021 DebitCreditDebitCreditCash $12,000 $22,000 Investments (1) 14,000 14,000 Equipment (2, 3) 150,000 190,000 Accumulated depreciation $38,000 $63,500Recourse notes payable (4) 58,000 87,200Nonrecourse notes payable 36,000 30,000Phil, capital 28,000 28,000Phil, drawing (5) 25,440 Kate, capital 16,000 16,000Kate, drawing (5) 16,960 Revenues 235,000Dividend income (1) 1,000Interest income (1) 400Section 1245 gain (depreciation recapture) (2) 3,500Compensation (6) 110,000 Rent expense 12,000 Interest expense 16,600 Tax expense (property and payroll) 13,800 Repair expense 5,800 MACRS depreciation 29,200 Health insurance expense (7) 1,600 Property insurance expense 1,500 Office supplies expense 3,000 Utility expense 2,200 Charitable contribution 500 Total $176,000$176,000$464,600$464,600

1. The investment account consists of marketable securities of U.S. corporations and U.S. Treasury Bonds. All of the dividends are considered qualified dividends.
2. Equipment was sold May 12, 2022, for $9,800. It was purchased new on May1 of the prior year for $10,000 and its basis when sold was $6,300.
3. New equipment was purchased March 1, 2022, with $5,000 cash and a $35,000 three-year recourse note payable. The first note payment is March 1, 2023. (Note: The correct amount of tax depreciation is included in the depreciation expense account in the trial balance.)
4. Notes payable are long-term except for $20,000 of the recourse notes to be paid next year. All liabilities were created by the partnership.
5. The partners' drawing accounts record cash distributions made to the partners throughout the year.
6. Compensation is composed of guaranteed payments of $30,000 each to Phil and to Kate and $50,000 to unrelated employees.
7. Health insurance premiums paid were for the unrelated employees.

Prepare a 2022 (or 2021 if the 2022 tax forms are not yet available) Form 1065, Schedule K, Schedules L and M (even though not required by the IRS instructions to Form 1065), and Schedule K-1 for Phil. Complete all pages, including responses to all questions. If any necessary information is missing in the problem, assume a logical answer and record it. Do not prepare Schedule K-1 or other required supplemental forms for Kate at this time. Use the Worksheet for Figuring Net Earnings (Loss) from Self-Employment included in the Form 1065 instructions to calculate the partners' self-employment income. Note that if you are preparing a 2021 Form 1065 you will need to adjust all indicated years in this problem to fit the 2021 tax year.