ACT 4495

Spring 2016

Partnership return

On January 1, 2000, two enterprising women in the community, Sally Love and Lauren Sunshine anticipated a boom in the local fitness industry and decided to sell their small general contracting businesses and pool their resources as partners in opening a yoga studio and fitness drink shop. Their general partnership was officially formed under the name of YogaLab and soon became a thriving business.

YogaLab is located at 538 Tree Lane, Troy, AL 35043.

YogaLabs Employer Identification Number is 91-3659244.

YogaLabs business activity is personal service.

Both general partners are active in the management of YogaLab.

Sally Loves Social Security number is 999-99-1234. Her address is 3050 N.

Audrey Drive, Troy, AL 35043.

Lauren Sunshines Social Security number is 999-99-4321. Her address is 406 S.

Coco Street, Troy, AL 35043.

YogaLab uses the accrual method of accounting and has a calendar year-end.

Required:

Using the information provided below, complete YogaLabs 2015 Form 1065. Also complete Sally Loves and Lauren Sunshines Schedule K-1s.

Also, please complete the first page of each partners 2015 Form 1040 (page 1 only!).

Forms 4562 and 4797 are not required. Use the amount of tax depreciation and 179 expense provided in the income statement and the information in #3 to complete the appropriate lines on the first page, Schedule K of the Form 1065 and Schedule K1.

The balance sheet on the Form 1065 is not required.

If any information is missing, use reasonable assumptions to fill in any gaps, and document those assumptions on a separate page, clearly labeled. IF you feel there is any absolutely crucial information missing, please let me know and I will ask the clients for you.

The forms, schedules, and instructions can be found at the IRS Web site (www.irs.gov). The instructions can be helpful in completing the forms.

Please turn in on paper in the following order: Form 1065, Sally Loves K1, Sally Loves 1040, Lauren Sunshines K1, Lauren Sunshines 1040, calculations, assumptions. The instructions for the Schedule K1 are not necessary.

What is each partners balance in their capital account at the end of 2015?

Sunshine $ __________________________

Love $ __________________________

The following is YogaLabs 2015 income statement:

YogaLab

Income Statement

For year ending December 31, 2015

Yoga Class Revenue $300,000

Sales (on account) $110,000

Less: Sales returns - 5,000

$105,000

Cost of goods sold - 95,000

Gross profit on sales and services $310,000

Operating expenses

Salaries and wages (including

partners guaranteed payments) $99,000

Property taxes 1,600

Payroll taxes 2,500

Depreciation and 179 expense 20,016

Advertising 2,000

Office expense 950

Repairs 1,200

Miscellaneous 500

Insurance 2,800

130,566

Net operating income $179,434

Other income

Gain on sale of securities $ 1,150

Dividend income 700

Interest income 2,260

4,110

$183,544

Other deductions

Interest on mortgage $ 7,560

Interest on notes payable 4,800

Charitable contributions 5,000

Life insurance premiums 3,000

20,360

NET INCOME $163,184

Notes:

1. The partners percentage ownership of original contributed capital is 40 percent for Sunshine and 60 percent for Love. They agree that profits and losses would be shared according to the 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; however in no event may the year-end capital account balances vary from the 40:60 ratio by more than 5 percent of total capital.

2. For their services to the company, the partners would receive the following annual guaranteed payments:

Love $28,000

Sunshine $21,000

Love is expected to devote all of her time to the business, while Sunshine will devote approximately 50 percent of her time.

3. The partnership uses currently allowable tax depreciation methods for both regular tax and book purposes and has adopted a policy of electing not to take bonus depreciation. However, the partners have no policy on the use of Section 179. The partnership purchased new equipment in the current year in the amount of $7,953. They wish to utilize the depreciation method for the purchases that most decreases their taxable income.

5. 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 1, 2015, they executed a $50,000 note with the bank to obtain the $50,000 purchase price. Interest on the 9.6 percent note is payable quarterly, and the principal is due in one year. The first interest payment of $4,800 was made on December 30, 2015. It seems to have been a good investment: the value of the land is now $55,000.

6. 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 to the partners by their capital account ratios. The Accounts Payable balance is $40,000 at the end of the year.

7. Some years after the partnership was formed, they obtained a mortgage of $112,500 on a commercial real estate property from Troy State Bank. Principal payments of $4,500 must be paid each December 31, along with 8 percent interest on the outstanding balance from the prior year end. The holder of the note agreed to look only to the property as security in the event of default. As of the end of 2014, the balance on the mortgage was $94,500.

8. During the year, the partnership bought 700 shares of Tybo, Ltd., for $7,200 on February 3, 2015. All the shares were sold for $7,750 on April 4, 2015.

9. Two hundred shares of Gizzys Gizmos Inc were sold for $10,400 on September 26,

2015. The stock was purchased on December 1, 2004, for $9,800.

10. The following dividends were received:

NOP (qualified) $400

LMN, Ltd. (not qualified) 300

Total $700

11. The partnership received interest income from the following sources:

Interest on Alabama municipal bonds $1,200

Interest on savings 560

Interest on accounts receivable 500

Total $2,260

12. The partnership donated $5,000 cash to the Red Cross.

13. Life insurance policies on the lives of Love and Sunshine were purchased in the prior year. The partnership pays 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 policy.

14. The partners withdrew the following cash amounts from the partnership during the year (in addition to their guaranteed payments):

Love $20,000

Sunshine $35,000

15. The partners capital balances were as follows as of the end of 2014: Love $300,000, Sunshine $200,000.