Question

Exercise 21-20 (LO. 7) This year, the Tastee Partnership reported income before guaranteed payments of$92,000. Stella owns a 90% profits interest and works 1,600 hours per year in the business. Euclid owns a 10% profits interest (with a basis of $30,000 at the beginning of the tax year) and performs no services for the partnership during the year. For services performed during the year, Stella receives a "salary" of $6,000 per month. Euclid withdrew $10,000 from the partnership during the year as a normal distribution of cash from Tastee (i.e., not for services) If required, round your answers to the nearest dollar. a. What is the amount of guaranteed payments made by the partnership this year? b. How much is the partnership's ordinary income after any permitted deduction for guaranteed payments? c. How much income will Stella report? d. How much income will Euclid report?

Answer 1

Answer:-

a)

Calculation of amount of guaranteed payment made by partnership during 2016:

Guaranteed payment = Guaranteed salary× No of months

=6,000×12

=72,000​

Therefore, amount of guaranteed payment made by partnership during 2016 is 72,000.

Part a

Amount of guaranteed payment made by partnership during 2016 is 72,000.

Explanation | Common mistakes | Hint for next step

It is given that salary received by Stella is 6,000 per month. It is the kind of guaranteed payment. The guaranteed payment can be found by converting the salary for 12 months. Thus, 6,000 should be multiplied with 12. Therefore, Amount of guaranteed payment made by partnership during 2016 is 72,000.

b)

Calculation of the partnership’s ordinary income after deduction for guaranteed payments:

Guarantee payment = guarantee salary x number of months

= 6000*12

= 72000

Therefore, Partnership’s ordinary income after deduction for guaranteed payment is 20,000.

Part b

Partnership’s ordinary income after deduction for guaranteed payment is 20,000.

Explanation | Common mistakes | Hint for next step

It is given that income before guaranteed payment is 92,000. The guaranteed payment made is the salary. When salary is deducted from income before guaranteed payment it is known as the income after deduction of guaranteed payment. When salary of 72,000 is deducted the income after guaranteed payment is 20,000.

Step 3 of 3

c)

Calculation of reporting income of Stella and Euclid:

Calculation of reporting income of Stella:

	Particulars	Amount	Workings
	Income before guaranteed payment	92000
Less;	Guaranteed Payment	72000	6000*12
	Income after guaranteed payment	20000

Therefore, reporting income of Stella for 2016 is 90,000.

Calculation of reporting income of Euclid:

Reporting income=(Income after guaranteed payment×Percentage of profit interest)

=20,000×10%

=2,000

Therefore, reporting income of Euclid for 2016 is 2,000.

Part c

Reporting income of Stella is 90,000 and for Euclid is 2,000.

Explanation | Common mistakes

It is calculated that partnership’s ordinary income after deduction for guaranteed payment is 20,000. It is the actual income of the partnership. Stella owns 90 percent of profits interest. 90 percent of 20,000 is 18,000. Her total income will be calculated by adding her salary of 72,000 with the profit of 18,000. Therefore, her reporting income is 90,000. Euclid owns 10 percent of profits interest. 10 percent of profit interest on income after deducting guaranteed payment is 2,000. Therefore, her reporting income is 2,000.

Part a

Amount of guaranteed payment made by partnership during 2016 is 72,000.

Part b

Partnership’s ordinary income after deduction for guaranteed payment is 20,000.

Part c

Reporting income of

Stella is 90,000

Euclid is 2,000.