Reference no: EM132663359
Problem - The KL Partnership is owned equally by Kayla and Lisa. At the beginning of the year, Kayla's basis is $20,000 and Lisa's basis is $16,000. Partnership debt did not change from the beginning to the end of the tax year. KL reported the following income and expenses for the current tax year:
Sales revenue $150,000
Cost of sales 80,000
Distribution to Lisa 15,000
Depreciation expense 20,000
Utilities 14,000
Rent expense 18,000
Long-term capital gain 6,000
Payment to Mercy Hospital for Kayla's medical expenses 12,000
Required -
a. Prepare a Microsoft Excel spreadsheet that could be used in a CPA firm to accumulate KL's information that would be reported on Form 1065, page 1 [Ordinary business income (loss)] and page 4 (Schedule K). Include calculations and subtotals to ensure the spreadsheet will automatically update if the information changes. How much is the partnership's ordinary income on page 1? What information is shown on Schedule K?
b. Use the information in part (a) to prepare Form 1065, pages 1 and 4 (Schedule K) for the KL Partnership. On page 1, omit items A to J at the top if the facts do not provide that information. For Schedule K, line 14, assume both partners are active in the partnership.
c. Add columns to your spreadsheet to allocate amounts to Kayla and Lisa. (For this requirement, disregard the income from self-employment and information related to the qualified business income deduction.) Show the partners' allocation percentages at the top of their columns, and use those percentages in formulas to allocate any separately stated items that should be allocated. (Note that some items are directly assigned to a partner.) What information will be shown on Kayla's and Lisa's Schedules K-1, Part III? What items will Kayla and Lisa report on their Federal income tax returns?
d. Expand your spreadsheet. Add rows for beginning basis and ending basis below Kayla's and Lisa's columns, and calculate each partner's ending basis in the partnership interest. How do you make this calculation? What is each partner's basis in her partnership interest at the end of the tax year?
e. Consider the results if the partnership's revenues were $100,000 instead of $150,000. What happens if you update the revenues line on your spreadsheet? Are your new amounts correct for the Form 1065/Schedule K information, Schedule K-1 information, and partners' bases? Why or why not? What conclusions can you draw?