[Jwhere]

Hey all, going through the questionths and it seems like they aren’t consistent on how to break out profits on partnerships… Since I can’t copy the questions verbatim I’ll change words up. Hopefully someone can explain why there is a major difference between the two computations.

Problem 1:

Bob is a 25% partner in REG partnership. He receives 25% of the ordinary income and also guaranteed payments of $1,000 per month which is deductible by the partnership. The partnership reports ordinary income of $88,000. How much should Bob report as total income from the partnership?

Book Answer 1:

$34,000 = (88,000 * 25%) + (12 * 1,000)

***my take*** I think it should be $31,000 = 12,000 + [(88,000-12,000) * 25%]

Problem 2 (follows my reasoning):

A and B form a partnership where each person gets 50% of profits. A gets a $7,500 guaranteed payment from the partnership. The partnerships net income before guaranteed payments was $45,000. What amount is included in B’s tax return?

Answer 2:

18,750 = (45,000-7,500) * 25%

These both come from the same book (a very mainstream book). They follow two sifferent lines of calculation, am I missing something?

[Last_First_MI]

I think on the first you are confused as it states ORDINARY INCOME in a nutshell the 1K per month is already deducted from the partnership income.

You gotta be careful of this stuff all the time they like to be tricky with you on these questions.

[Anonymous]

ordinary income means that the guaranteed payments have already been deducted. however, if it says ordinary income BEFORE GUARANTEED PAYMENTS, then you have to deduct the guaranteed payments before allocating the ordinary income.

[kandisjoy]

Problem 1:

We are trying to find out how much income Bob should report on his tax return. Watch out for the term “Before guaranteed payments.” That means that before figuring out profit sharing, you need to deduct the guaranteed payments. In Problem 1, the term “before guaranteed payments” is not used, which is your first hint that guaranteed payments have already been factored into Ordinary Income.

He received: $1,000 * 12 = $12,000 in guaranteed payments from the partnership

$88,000 * .25 = $22,000 in partnership profits

The reason you don't subtract out the $12,000 from ordinary income is that ordinary income already includes the guaranteed payments deduction.

FAR: 71, 77
BEC: 70, 82
AUD: 62, 78
REG: 71, 68, 85

CA Licensed 11/2011

[Jwhere]

Great, that makes a LOT more sense now, thank you all!

[misanthrope87]

I didn't know ordinary income meant that the guaranteed payments were deducted! Good to know!

B 2/12 87
A 11/11 90
R 8/11 86
F 5/12 88

[kb24]

If you look at a K-1 form there are separate entries for ordinary income (box 1) and guaranteed payments (box 4).

FAR 4/1/11 - 89
AUD 4/15/11 - 85
REG 4/29/11 - 80
BEC 5/13/11 - 85

[Last_First_MI]

KB does have a good point and is probably technically correct as the K1 is stated this way and some will say the two items are separate and some will say one includes the other, but when it comes to the CPA Exam it is usually the best answer and I am not sure what all the choices are and in my experience only one of the answers that were calculated will be an option as an answer. Remember not all the questions on the CPA exam are cut and dry sometimes you just have to choose a best answer and if both answers are on there then its only one question and it isn't going to really have that much effect on your overall score, plus when they compile all of the data this question probably should raise a flag if both good answers are there and they will then look at it.

If you are taking the exam and this question pops up and both viable answers are there try to remember the testlet and the number so that you can write to the Examiners and let them know of their screw up.

[kb24]

Last_First_MI is correct that questions aren't always cut and dried but that you can often figure out which way to go on the MCQ because only one of the answers that you think might be right is present. A word of warning about REG, though. I don't know what's going on, but several people including myself had a number of poorly worded questions in which it was unclear what the examiners were asking. With the MCQ I could sometimes figure out which way to go based on the answers, but it was a lot tougher on the SIMs. I didn't have this issue with the other exams, and I haven't seen any complaints along these lines except for REG.

FAR 4/1/11 - 89
AUD 4/15/11 - 85
REG 4/29/11 - 80
BEC 5/13/11 - 85

[rmm91909]

I am struggling a lot with that module. I feel like i am guessing on the MCQ which I know isn't good. I just can't seem to memorize the equations.

[Author]

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