Tax Return Problem. Phil Smith and Kate Jones formed the P&K General Partnership on March 1, 2014 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 near by 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, 2017 balance sheet and December 31, 2018 trial balance (both prepared for tax purposes) contain the follow- ing information: Balance Sheet 12/31/2017 Trial Balance 12/31/2018 Debit Credit Debit Credit $22,000 14,000 190,000 14,000 38,000 58,000 36,000 28,000 63,500 87,200 30,000 28,000 25,440 16,000 16,000 16,960 235,000 1,000 400 3,500 Section 1245 gain (depreciation recapture) (2) 110,000 12,000 16,600 13,800 5,800 29,200 1,600 1,500 3,000 2,200 500 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 Equipment was sold May 12, 2018 for $9,800. It was purchased new on May 1 of 2. the prior year for $10,000 and its basis when sold was $6,300. 3. New equipment was purchased March 1, 2018 with $5,000 cash and a $35,000 three-year recourse note payable. The first note payment is March 1, 2019. (Note: The correct amount of tax depreciation is included in the depreciatiorn 4. Notes payable are long-term except for $20,000 of the recourse notes to be paid 5. The partners' drawing accounts record cash distributions made to the partners 6. Compensation is composed of guaranteed payments of $30,000 each to Phil and expense account in the trial balance.) next year. All liabilities were created by the partnership throughout the year. to Kate and $50,000 to unrelated employees. 7. Health insurance premiums paid were for the unrelated employees. Prepare a 2018 (or 2017 if the 2018 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 logi- cal 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 2017 Form 1065 you will need to adjust all indicated years in this problem to fit the 2017 tax year Tax Return Problem. Phil Smith and Kate Jones formed the P&K General Partnership on March 1, 2014 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 near by 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, 2017 balance sheet and December 31, 2018 trial balance (both prepared for tax purposes) contain the follow- ing information: Balance Sheet 12/31/2017 Trial Balance 12/31/2018 Debit Credit Debit Credit $22,000 14,000 190,000 14,000 38,000 58,000 36,000 28,000 63,500 87,200 30,000 28,000 25,440 16,000 16,000 16,960 235,000 1,000 400 3,500 Section 1245 gain (depreciation recapture) (2) 110,000 12,000 16,600 13,800 5,800 29,200 1,600 1,500 3,000 2,200 500 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 Equipment was sold May 12, 2018 for $9,800. It was purchased new on May 1 of 2. the prior year for $10,000 and its basis when sold was $6,300. 3. New equipment was purchased March 1, 2018 with $5,000 cash and a $35,000 three-year recourse note payable. The first note payment is March 1, 2019. (Note: The correct amount of tax depreciation is included in the depreciatiorn 4. Notes payable are long-term except for $20,000 of the recourse notes to be paid 5. The partners' drawing accounts record cash distributions made to the partners 6. Compensation is composed of guaranteed payments of $30,000 each to Phil and expense account in the trial balance.) next year. All liabilities were created by the partnership throughout the year. to Kate and $50,000 to unrelated employees. 7. Health insurance premiums paid were for the unrelated employees. Prepare a 2018 (or 2017 if the 2018 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 logi- cal 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 2017 Form 1065 you will need to adjust all indicated years in this problem to fit the 2017 tax year