Jhumpa, Stewart, and Kelly are all one-third partners in the capital and profits of Firewalker General Partnership. In addition to their normal share of the partnership's annual income, Jhumpa and Stewart receive an annual guaranteed payment of $10,000 to compensate them for additional services they provide. Firewalker's income statement for the current year reflects the following revenues and expenses: Sales revenue $ 340,000 Interest income 3,300 Long-term capital gains 1,200 Cost of goods sold (120,000 ) Employee wages (75,000 ) Depreciation expense (28,000 ) Guaranteed payments (20,000 ) Miscellaneous expenses (4,500 ) Overall net income $ 97,000 (Leave no answer blank. Enter zero if applicable.) b. How will Firewalker allocate ordinary business income and separately stated items to its partners

Question Completion:

a.Given Firewalker’s operating results, how much ordinary business income (loss) and what separately stated items [including the partners’ self-employment earnings (loss) will it report on its return for the year?

Firewalker General Partnership

a) In its return for the year, the partnership will report an ordinary business income of $117,000.  It will also report the guaranteed payments and share of remaining profits as allocated below.

b) Allocation of business income:

                                       Jhumpa   Stewart      Kelly         Total

Guaranteed payments  $10,000   $10,000                  $20,000

Share of profit                 32,333     32,333   $32,334    97,000

Total business income                                                  $117,000

Explanation:

a) Data and Calculations:

Share of profits and loss:

Jhumpa = 1/3

Steward = 1/3

Kelly = 1/3

Income Statement for the year:

Sales revenue             $ 340,000

Cost of goods sold        (120,000)

Gross profit                  $220,000

Interest income                   3,300

Long-term capital gains      1,200

Income                         $224,500

Employee wages            (75,000)

Depreciation expense   (28,000)

Miscellaneous expenses (4,500)

Net income                   $117,000

Appropriation Section:

Net income                   $117,000

Guaranteed payments (20,000)

Shareable income       $97,000

Allocation of business income:

                                       Jhumpa   Stewart      Kelly         Total

Guaranteed payments  $10,000   $10,000                  $20,000

Share of profit                 32,333     32,333   $32,334    97,000

Total business income                                                  $117,000

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