Question

Barb and Ken are partners in the Playhouse Partnership. They received guaranteed payments of $250,000 each and no other guaranteed payments were made by the partnership. Playhouse Partnership also reported the following items of income and expense for the current year:

Income from operations	$1,050,000
Dividends from Montreal-based corporation	225,000
Interest on Sears bonds	125,000
Real  estate taxes on property used  for office	50,000

What is Playhouse Partnership's ordinary income for the current year?

	a	$850,000
	b	$550,000
	c	$500,000
		d$625,000

Answer 1

Barb and Ken received a guaranteed payment as Partners. Since the question does not mention the capital invested by the two or the loan given by them to the Partnership, it is safe to assume that this income is a dividend paid to Barb and Ken and can only be distributed from the profit after tax. Hence, this line item will occur after the ordinary income in the Partnership’s P&L. The ordinary income to the Partnership is $1,350,000. This includes income from operations, dividends received from Montreal-based corporation and interest on Sears bonds. The tax on the real estate is the only expense, which will be subtracted from total income.

Income from operations	$           1,050,000
Dividends from Montreal-based corporation	$ 225,000
Interest on Sears bonds	$ 125,000
Real  estate taxes on property used  for office	$ (50,000)
Total	$ 1,350,000