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PARTNERSHIP TAX RETURN PROBLEM 2 Required: Using the information provided below, complete Arlington Building Supply's (ABS) 2011 Form 1065 and Schedule D. Also complete Jerry

PARTNERSHIP TAX RETURN PROBLEM 2 Required: Using the information provided below, complete Arlington Building Supply's (ABS) 2011 Form 1065 and Schedule D. Also complete Jerry Johnson and Steve Stillwell's Schedule K-1. Form 4562 for depreciation is not required. Use the amount of tax depreciation and 179 expense provided in the income statement and the information in #4 below to complete the appropriate lines on the first page and on Schedule K of Form 1065. Page C21 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 #4 and #5 below to complete the appropriate lines on the first page and on Schedule K of Form 1065. If any information is missing, use reasonable assumptions to fill in any gaps. 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. Facts: On January 1, 2001, two enterprising men in the community, Jerry Johnson and Steve \"Swiss\" 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 tree-houses. Their general partnership was officially formed under the name of Arlington Building Supply and soon became a thriving business. ABS is located at 2174 Progress Ave., Arlington, IL 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 is 500-23-4976. His address is 31 W. Oak Drive, Arlington, IL 64888. Steve Stillwell's Social Security number is 374-68-3842. His address is 947 E. Linder Street, Arlington, IL 64888. ABS uses the accrual method of accounting and has a calendar year-end. The following is ABS's 2011 income statement: ABI Income Statement For year ending December 31, 2011 Sales (on account) Less: Sales returns Cost of goods sold Gross profit on sales Operating expenses Salaries and wages (including partners' guaranteed payments) Property taxes Payroll taxes Depreciation and 179 expense Advertising Bad debt expense Office expense Repairs $410,00 0 20,000 $390,000 150,000 $240,000 $79,000 1,600 2,450 40,062 2,000 3,850 1,800 2,150 Miscellaneous Fire insurance Net operating income 450 4,850 138,212 $101,788 ABI Income Statement For year ending December 31, 2011 Other income Gain on sale of securities Gain on sale of truck Dividend income Interest income $1,350 16,399 695 4,260 Other deductions Interest on mortgage Interest on notes payable Charitable contributions Life insurance premiums Loss on sale of forklifts NET INCOME $5,400 2,250 5,000 3,000 466 22,704 $124,492 16,116 $108,376 Page C22 Notes: 1. The partnership maintains its books according to the 704(b) regulations. Under this method of accounting, all book and tax numbers are the same except for life insurance premiums and taxexempt interest. 2. The partners' percentage ownership of original contributed capital is 30 percent for Johnson and 70 percent for Stillwell. They agree that profits and losses will be shared according to this same ratio. Any additional capital contributions and withdrawals must be made in these same ratios. 3. For their services to the company, the partners will receive the following annual guaranteed payments: Johnson Stillwell $28,000 $21,000 4. Johnson is expected to devote all his time to the business, while Stillwell will devote approximately 75 percent of his. 5. Two forklifts were sold in September 2011. The old lifts were purchased new four years ago. Two new forklifts were purchased on September 1, 2011, for $32,000 and the partnership intends to immediately expense them under 179 (see depreciation and 179 expense in the income statement above). 6. The truck sold this year was purchased several years ago. $16,099 of the total gain from the sale of the truck should be recaptured as ordinary income under IRC 1245. 7. The partnership uses currently allowable tax depreciation methods for both regular tax and book purposes and has adopted a policy of electing not to claim bonus depreciation. Assume alternative minimum tax depreciation equals regular tax depreciation. 8. 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, 2011, they executed a $50,000 note with the bank to obtain the $70,000 cash purchase price. Interest on the note is payable quarterly, and the principal is due in one year. The first interest payment of $1,000 was made on December 30, 2011 (see interest on notes payable in income statement above). 9. 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. 10. 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 8 percent interest on the outstanding balance (see interest on mortgage in income statement above). 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. Page C23 11. 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. 12. During the year, the partnership bought 300 shares of ABC, Ltd., for $6,100 on February 8, 2011. All the shares were sold for $6,650 on April 2, 2011. 13. Two hundred shares of XYZ Corporation were sold for $10,600 on September 13, 2011. The stock was purchased on December 1, 2005, and is not eligible for the 28 percent capital gains rate. 14. The following dividends were received: XYZ (qualified) ABC, Ltd. (not qualified) Total 15. $400 295 $695 The partnership received interest income from the following sources: Interest on Illinois municipal bonds Interest on savings Interest on accounts receivable Total $3,200 560 500 $4,260 16. 17. 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 (see income statement above), and no cash surrender value exists for the first or second year of the policy. 18. The partners withdrew the following cash amounts from the partnership during the year (in addition to their guaranteed payments): Johnson Stillwell $20,000 $35,000 The following are ABS's balance sheets as of January 1, 2011, and December 31, 2011. 12/31/11 Assets Cash Accounts receivable Inventories Investment in municipal bonds Investment in XYZ common stock 1/1/11 $70,467 76,000 60,000 50,000 40,200 $43,042 57,000 50,000 50,000 50,000 Truck $ 16,500 13,649 Less accumulated depreciation 2,851 Machinery and equipment Less accumulated depreciation $ 66,000 58,697 Building Less accumulated depreciation $ 50,000 34,376 $120,000 39,875 7,303 15,624 $120,000 36,798 80,125 90,000 $474,095 Land TOTALS 83,202 20,000 $371,719 12/31/11 Liabilities and Capital Accounts payable Notes payable Mortgage payable Capital: Jerry Johnson Steve Stillwell TOTALS 1/1/11 $49,000 50,000 63,000 94,553 217,542 $474,095 $45,500 0 67,500 82,040 176,679 $371,719