Question

During 2016, 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 and performs no services for the partnership during the year. For services performed in 2016, Stella receives a "salary" of $6,000 per month. Euclid withdrew $10,000 from the partnership during the year.

If required, round your answers to the nearest dollar.

a. What is the amount of guaranteed payments made by the partnership during 2016?

b. How much is the partnership’s ordinary income after any deduction for guaranteed payments?

c. For 2016, how much income will Stella and Euclid report?

Stella: $___________

Euclid: $___________

Expert Answer

Answer 1

Answer: a. $72,000

b) $20,000

c) Stella $90,000

Euclid $2,000

Explanation:

a) The guaranteed payments in this scenario will be the salary that Stella receives per month. Stella is said to receive $6,000 per month.

The period is determined to be a year so she received $6,000 per month for 12 months.

= 6,000 * 12

= $72,000

b) With an income of $92,000, the partnership made guaranteed payments to Stella to the tune of $72,000. The amount after the payment is,

= 92,000 - 72,000

= $20,000

c) The Income after the Payments is $20,000.

Stella is said to have 90% of that so she gets,

= 20,000 * 90%

= $18,000.

Adding that to the $72,000 she was paid,

= 72,000 + 18,000

= $90,000

Stella will report $90,000 as income.

Euclid with 10% of the profit sharing ratio will report,

= 10% * 20,000

= $2,000

Euclid will report $2,000 as Net Income.

The $10,000 withdrawn by Euclid is not considered income.