|SUBDOMAIN 302.2 – FEDERAL INCOME TAX
Competency 302.2.2: Tax Treatments for Partnerships, Estates, and Trusts – The student determines the tax treatment for partnerships, estates, and trusts.
302.2.2-01: Calculate ordinary income for a partnership.
302.3.2-02: Reconcile taxable income to book income.
302.2.2-03: Calculate the basis of a partner’s interest.
302.3.2-04: Calculate the impact of applying tax law to assets contributed to a partnership.
302.2.2-05: Calculate the impact of applying tax law to partnership liabilities.
302.3.2-06: Calculate the impact of applying tax law for various ways that ownership in a partnership changes.
The Year 10 financial statements for a partnership, Fan Company A, have been provided on the “Year 10 Financial Statements” worksheet (see the “Partnership Income and Tax” attachment below). The Year 11 financial data is also provided on the “Year 11 Financial Data” worksheet (see the “Partnership Income and Tax” attachment below).
Use ‘Admit Partner D to Partnership’ template section for this data.
On January 1, Year 11, Partner A died. The partnership agreement stipulated that in the event of a partner’s death, the partner’s interest would be paid to the estate within 90 days of the date of death. The balances in the partnership accounts were determined on January 1. The partnership has the authority by the partnership agreement to sell the deceased partner’s interest at a minimum of 100% of the capital account at the date of death. The remaining partners found an interested party, Partner D, who paid $350,000 for Partner A’s interest. The partnership agreement specifies that any bonus accruing from the sale of a deceased partner’s interest will be added to the remaining partners as of the date of death. Partner B will receive 5/8 of the bonus and Partner C will receive 3/8 of the bonus.
Use the ‘REALIGNMENT OF PARTNERSHIP ALLOCATIONS’ template section for this data.
On October 1, Year 11, the partners agreed to add a new partner. Partner E will own a 20% share of the partnership. Partner E has some expertise that will benefit the partnership. Partner E is investing $50,000 and land worth a fair market value of $200,000. The partnership will assume the $60,000 mortgage remaining on the land. The ownership allocations will be realigned to allow this new owner a 20% interest.
On December 31, Year 11:
- The partnership agreement states that all capital balances are paid a 10% interest allowance based on the balance on December 31, before any distributions of net income or salary allowances. Partner E’s interest allowance in this first year will be based on three months of ownership interest in the partnership.
- The partnership agreement stipulates that Partner B and Partner C each receive a salary allowance of $30,000.
- A review of the withdrawals by the partners taken during the year revealed the following amounts for each partner: Partner B, $60,000; Partner C, $35,000; Partner D, $15,000; and Partner E, $30,000.
- The remaining net income (loss) is distributed according to the partner’s share of ownership. Income and loss distributions are the same percentage.
A. Perform the calculations necessary to complete the following financial statements using the information provided in the given and the Excel templates provided.
1. Income Statement for Year 11 (Use the “Year 11 Partnership Distribution” worksheet found in the “Partnership Income and Tax” attachment below.)
2. Partnership Distribution for Year 11 (Use the “Year 11 Partnership Distribution” worksheet found in the “Partnership Income and Tax” attachment below.)
B. Write a brief discussion (suggested length of 1 paragraph) commenting on the need for reconciling book income for a partnership to taxable income for that partnership for tax purposes.
Note: Please save word-processing documents as *.rtf (Rich Text Format) or *.pdf (Portable Document Format) files.
Note: For definitions of terms commonly used in the rubric, see the attached Rubric Terms.
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||Partnership Income and Tax
A rubric is used in this Evaluation.
Name of rubric: ACA1 302.2.2-01-06 [View rubric]
Final scoring method: Evaluator marks as “Meets Requirement/Does not Meet Requirement”