TA B L E OF CONTENTS

PREFACE .......................................................................................................................... vii

CORPORATION PRACTICE SETNo More Ice, Inc.

Facts ............................................................................................................................ 1
Forms .......................................................................................................................... 7

S CORPORATION PRACTICE SETThe Eerie Ensembles Corp.

Facts ............................................................................................................................ 25
Forms .......................................................................................................................... 31

PARTNERSHIP PRACTICE SETWalk Upright Company

Facts ............................................................................................................................ 49
Forms .......................................................................................................................... 55

Instructions for these tax forms can be found at the Internal Revenue Service Website:

www.irs.gov

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P R E FAC E

Although these practice sets are designed for use with South-Westerns Federal Taxation Series,
they can be used effectively with most introductory textbooks on taxation. The practice sets
should be assigned after coverage of the related materials, as they are comprehensive and require
substantial text coverage for successful completion.

The practice sets include the common forms that would be used. Practice sets for corporation,
S corporation, and partnership returns are enclosed. Practice sets for individual returns are
published separately.

All comments or suggestions will be appreciated.

Donald R. Trippeer
State University of New York - Oneonta
trippedr@oneonta.edu

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C O R P O R AT I O N P R AC T I C E S E T

No More Ice, Inc.

Federal Tax Return

FACTS
No More Ice, Inc. is owned by Rupert M. Peary and his wife, Josie J. Peary. The corporation
manufactures a cordless handheld heated blower that melts snow and ice from car windshields.
The device uses a 21 volt rechargeable battery (business activity code number 339900). The
corporation has reported positive financial and taxable incomes since inception. The company is
located at 200 Snowcap Way, Denali, Alaska 99502. The companys employer identification
number is 98-7654321, and the calendar year is used for tax purposes. The date of incorporation
was March 14, 2007.

Rupert M. Peary (social security number 111-11-1111) is an 80 percent shareholder and

president of the company. Josie J. Peary (social security number 123-45-6789) is a 20 percent
shareholder and vice president of the company. Both persons devote 100 percent of their time to
the corporation. Ruperts compensation is $138,326 per year, and Josies compensation is
$76,848 per year.

The corporation is not a personal holding company. While the corporation is a closely-held
C corporation, it does not engage in activities to which the at-risk or passive activity loss
limitations apply.

The corporation files its tax return on the accrual method. Inventory has been consistently valued
at cost under the FIFO method using the full absorption procedure. Inventory capitalization rules
of Internal Revenue Code Section 263A do not apply due to the small business exception
(average annual gross receipts for the three preceding taxable years do not exceed $10 million).
The accounting records are computerized.

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The corporations audited income statement and balance sheet for the current year, prepared by
the accounting firm of Bering & Beaufort, CPAs, follow:

NO MORE ICE, INC.

INCOME STATEMENT
For the Year Ending December 31, 2012

Revenue:
Sales (net) .................................................................... $ 6,173,837)
Cost of goods sold ....................................................... (5,143,732)
Gross profit ...................................................................................... $ 1,030,105)
Operating expenses:
Compensation of officers ............................................ $ 215,174)
Other salaries and wages ............................................. 473,329)
Rental expense ............................................................ 32,430
Interest expense ........................................................... 82,049)
Fines for improper disposal of waste .................... ...... 2,613)
Advertising .................................................................. 8,268)
Contributions ............................................................... 34,583)
Bad debt expense ........................................................ 3,074)
Depreciation expense .................................................. 105,980)
Taxes ........................................................................... 74,543)
Repairs and maintenance ............................................ 6,926)
Miscellaneous expenses .............................................. 18,715
Total operating expenses .................................................................. $(1,057,684)
Net Income from Operations ............................................................ $ (27,579)
Other income and loss:
Dividend income ......................................................... $ 102,735)
Interest income ............................................................ 2,250)
Loss on sale of investment in stock ............................ (2,458) 102,527)
Net Income (Loss) before income tax .............................................. $ 74,948)
Income tax expense ................................................................................ (3,073)
Net Income ....................................................................................... $ 71,875)

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 NO MORE ICE, INC.
STATEMENT OF FINANCIAL POSITION
December 31, 2012
Beginning End
ASSETS of Year of Year
Current Assets:
Cash & Marketable Securities ..................................... $ 452,122) $ 438,837)
Accounts receivable ..................................................... 218,324) 246,354)
Allowance for Doubtful Accounts ......................... (13,833) (15,178)
Inventory ...................................................................... 500,247) 605,599)
Total current assets ................................................ $1,156,860 $1,275,612)
Machinery, Building, and Land:
Machinery .................................................................... $ 299,705) $ 342,357)
Less: Accumulated depreciation ............................ (92,218) (167,990)
Building ....................................................................... 1,057,319) 1,057,319)
Less: Accumulated depreciation ............................ (127,128) (157,334)
Land ............................................................................. 76,847) 76,847)
Total equipment, building, and land (net) ............. $1,214,525) $1,151,199)
Other assets:
Goodwill ...................................................................... 0) 22,479)
Total Assets ............................................................ $2,371,385) $2,449,290)
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Accounts payable ......................................................... $ 197,037) $ 212,000
Notes payable (less than one year) .............................. 158,306) 139,862
Total current liabilities ........................................... $ 355,343) $ 351,862)
Notes payable (one year or more) ...................................... 745,422) 801,809)
Total Liabilities ...................................................... $1,100,765) $1,153,671)
Common stock (20,000 shares authorized, 9,702
shares issued and outstanding, $10 par) ...................... $ 97,020) $ 97,020)
Additional paid-in capital .................................................. 825,152) 825,152)
Retained earnings ............................................................... 348,448) 373,447)
Total Shareholders Equity .................................... $1,270,620) $1,295,619)
Total Liabilities and Shareholders Equity ............ $2,371,385) $2,449,290)

STATEMENT OF RETAINED EARNINGS

Beginning Retained Earnings ................................ $348,448)
Net income for the year ......................................... 71,875)
Dividends paid in cash ........................................... (46,876)
Ending Retained Earnings ..................................... $373,447)

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ADDITIONAL INFORMATION
1. No More Ice, Inc. made estimated tax payments attributable to 2012 of $4,611. The
corporation also had a credit from an overpayment of its prior year Federal income taxes of
$416 that it elected to apply against its 2012 tax liability.

2. All notes payable were issued at par and provide market interest rates.

3. Ignore state income taxes.

4. Dividend income is from the following sources:

AT&T Corp. ............................................................................................... $60,470
Dell Corp. ................................................................................................... 23,054)
Voltage, Inc. (No More Ice, Inc. owns 85% of Voltages stock) ............... 19,211)
Total ...................................................................................................... $102,735)

5. An analysis of the Allowance for Doubtful Accounts reveals:

Balance, 01/01/12 ...................................................................................................... $13,833)
2012 Transactions
Provision for bad debts ............................................................................... 3,074
Recoveries of bad debts .............................................................................. (653)
Accounts written off as uncollectible ......................................................... (1,076)
Balance, 12/31/12 ................................................................................. $15,178)

6. Goodwill of $22,479 arose on purchase of another business on 01/01/12. Amortization is not

being taken for financial purposes.

7. Assume that deductions for tax depreciation (i.e., Modified Accelerated Cost Recovery) for
the year total $125,537. For this practice set do not complete Form 4562 (Depreciation and
Amortization), but you must input the depreciation amount on Form 4562 for H&R Block
Business to calculate limitations properly.

8. Meals and entertainment costs of $1,536 included in Miscellaneous Expenses are subject to
the 50% disallowance rule.

9. Contributions included:
Wildlife Federation ..................................................................................... $29,664)
Government of Kenya ................................................................................ 3,383)
Denali Food Bank ....................................................................................... 1,536)
Total ...................................................................................................... $34,583)
All contributions were paid in cash during the year except for the Food Bank contribution
which was pledged by the corporation (i.e., approved by the Board of Directors) on
December 17, 2012 and paid on May 2, 2013.
10. Included in interest income is $1,269 from $32,343 of Anchorage, Alaska General
Obligation Bonds held throughout the current year. These bonds are included in the
marketable securities account.

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11. On 05/19/12 the corporation sold 100 shares of Plug Corp. common stock for $8,454. The
stock had been purchased on 07/23/08 for $10,912.

12. Voltage, Inc. is a subsidiary of No More Ice, Inc., formed in 2010, and operated in Wasilla,
Alaska for the purpose of manufacturing battery chargers. Historically Voltage, Inc. has
been profitable and had a taxable income of $78,629 and an Alternative Minimum Taxable
Income [Form 4626, Ln. 7] of $79,143. No More Ice, Inc. and Voltage, Inc. have agreed to
share equally any limitations on item(s) that the income tax law restricts across the
corporations so long as the equal allocation results in utilization of maximum benefits
available. However, if a corporation does not have sufficient investment, income, or tax to
realize benefit of an item so allocated, any excess limitation shall be re-allocated to the other
corporation to the extent that other corporation has sufficient investment, income, or tax
liability to realize the benefit of the additional limitation. Sales by Voltage, Inc. to No More
Ice, Inc. are at arms-length prices (i.e., fair market values). No More Ice, Inc. has not
elected to file a consolidated income tax return with Voltage, Inc. Voltage, Inc. (EIN 12-
3456789) is located at 25 Husky Lane, Wasilla, Alaska 99623.

13. Form 4626 (Alternative Minimum TaxCorporations) must be included in the return. For
that purpose, assume the adjustment for depreciation of tangible property placed in service
after 1986 (Form 4626, Line 2a) is a $22,931 positive adjustment. Assume the Adjusted
Current Earnings (ACE) Adjustment on Line 4e is $-0-. [This assumption removes the ACE
adjustment from this practice set].

14. Disregard any penalty on underpayment of estimated tax.

15. Assume that compensation of officers and other salaries and wages do not relate to
production activities. This assumption removes the Domestic Production Activities
deduction from this practice set.

REQUIRED
From the above information, prepare No More Ice, Inc.s 2012 Federal income tax return (Form
1120), including all needed supporting statements, schedules, and forms. Unless otherwise noted,
assume No More Ice, Inc. follows the policies of making all elections to minimize its current
income taxes and, to the extent possible, of conforming procedures for financial and tax
accounting. Round amounts to the nearest dollar. If additional information is needed, make
realistic assumptions and fill in all required data.

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C O R P O R AT I O N P R AC T I C E S E T

No More Ice, Inc.

FORMS
Page
Form 1120
U.S. Corporation Income Tax Return ............................................................... 9

Schedule O (Form 1120)

Consent Plan and Apportionment Schedule for a Controlled Group ................. 14

Form 4626
Alternative Minimum TaxCorporations ....................................................... 18

Form 1125-A

Cost of Goods Sold.19

Schedule G (Form 1120)

Information on Certain Persons Owning the Corporations Voting Stock ....... 20

Form 1125-E
Compensation of Officers ................................................................................. 21

Form 8949
Sales and Other Dispositions of Capital Assets ................................................ 22

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S C O R P O R AT I O N P R AC T I C E S E T

The Eerie Ensembles Corp.

Federal Tax Return

FACTS
Noel Bertrand, a fashion designer, developed and patented a line of specialized Halloween
costumes for a variety of pets. The costumes are constructed for safety purposes and are made of
highly reflective materials for night-time use. Noel set up The Eerie Ensembles Corp. to
manufacture and sell her product. The Eerie Ensembles Corp. is owned by the Bertrand family.
The corporation is a small, closely-held manufacturer (the business code number is 339900, and
the employer identification number is 11-1111111). The company is located at 80 Hallow Way,
New Orleans, Louisiana 70130. The corporation, which uses a calendar year for tax purposes,
has been an S corporation since its incorporation on August 2, 2008.

Noel Bertrand (social security number 123-45-6789) is president of the corporation. Noel owned
100% of the stock until September 15, 2012 when she sold 1% to Brigitte Bertrand (Noels
sister, social security number 123-45-6788), who serves as vice president for the company. Both
officers devote 100 percent of their time to the corporation and live at 44 Spirit St., New Orleans,
Louisiana 70112. Annual compensation is $79,319 for Noel and $39,659 for Brigitte. The
corporation does not engage in activities to which the at-risk or passive activity loss limitations
apply.

The corporation files its tax return on the accrual method. Inventory has been consistently valued
at cost under the FIFO method using the full absorption procedure. Inventory capitalization rules
of Internal Revenue Code Section 263A do not apply due to the small business exception
(average annual gross receipts for the three preceding taxable years do not exceed $10 million).
The accounting records are computerized.

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The corporations audited income statement and balance sheet for the current year, prepared by
the accounting firm of Franken & Cullen, CPAs, follow:

THE EERIE ENSEMBLES CORP.

INCOME STATEMENT
For the Year Ending December 31, 2012

Revenue:
Sales (net) .................................................................... $2,492,944)
Cost of goods sold ........................................................ (1,845,902)
Gross profit ....................................................................................... $ 647,042)
Operating expenses:
Compensation of officers ............................................. $ 118,978)
Other salaries and wages .............................................. 270,544)
Employee benefits ........................................................ 12,122)
Rental expense ............................................................. 28,188)
Interest expense ............................................................ 15,043)
Advertising ................................................................... 7,714)
Key-person life insurance premiums ........................... 7,315)
Contributions ............................................................... 926)
Depreciation ................................................................. 36,065)
Taxes (other than income taxes) .................................. 25,577)
Repairs and maintenance ............................................. 14,398)
Miscellaneous expenses ............................................... 4,363)
Total operating expenses .................................................................. $(541,233)
Net Income from Operations ............................................................ $ 105,809)
Other income and loss:
Dividend Income .......................................................... $ 3,137)
Interest Income ............................................................ 496)
Gain on sale of investment in stock ............................. 2,672)
Gain on sale of machine ............................................... 9,584)
Casualty loss on machine ............................................. (661) 15,228)
Net Income ........................................................................................ $121,037)

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 THE EERIE ENSEMBLES CORP.
STATEMENT OF FINANCIAL POSITION
December 31, 2012
Beginning End
ASSETS of Year of Year
Current Assets:
Cash & Marketable Securities ..................................... $12,364) $12,602)
Accounts receivable ..................................................... 49,850) 31,462)
Inventory ...................................................................... 212,464) 204,682)
Total current assets ................................................ $274,678) $248,746)
Machinery and Equipment (M&E):
Machinery and Equipment ........................................... $314,882) $371,431)
Less: Accumulated depreciation ............................ (25,601) (48,117)
Total machinery and equipment (net) .................... $289,281) $323,314)
Other assets:
Life insurance cash surrender value ............................. $ 19,012) $ 24,154)
Total Assets ............................................................ $582,971) $596,214)
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Accounts payable ......................................................... $ 19,512) $ 22,894)
Notes payable (less than one year) .............................. 23,666) 24,854)
Total current liabilities ........................................... $ 43,178) $ 47,748)
Notes payable (one year or more) ...................................... 79,315) 37,296)
Total Liabilities ...................................................... $122,493) $ 85,044)
Common stock (33,048 shares authorized,
issued, and outstanding, $10 par) ................................. $330,480) $330,480)
Retained earnings ............................................................... 129,998) 180,690)
Total Shareholders Equity .................................... $460,478) $511,170)
Total Liabilities and Shareholders Equity ............ $582,971) $596,214)

STATEMENT OF RETAINED EARNINGS

Beginning Retained Earnings ................................ $129,998)
Net income for the year .......................................... 121,037)
Dividends paid during the year .............................. (70,345)
Ending Retained Earnings ..................................... $180,690)

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ADDITIONAL INFORMATION
1. Included in employee benefits expense are $602 and $430 premiums for $50,000 (face)
group term life insurance premiums for Noel and Brigitte, respectively. Family members are
named beneficiaries in the policies.

2. All notes payable were issued at par and provide market interest rates.

3. Employees account to the company and are reimbursed by the exact amount of travel and
entertainment expenses incurred on business. Included in Miscellaneous Expenses are
$1,813 for transportation expenses, $332 for meals, and $200 for entertainment.

4. Dividend income is from minor investments in:

Thread Corp. ................................................................................................ $2,209)
National Insurance Company (a dividend on the key-person
life insurance policy) ................................................................................... 928)
Total ....................................................................................................... $3,137)

5. Contributions were paid in cash to:

Save the Elephants ....................................................................................... $ 661)
Republican Party .......................................................................................... 265)
Total Contributions ................................................................................ $ 926)

6. The key-person life insurance policy provides $500,000 coverage on Noel Bertrand. The
company is the owner and beneficiary of the policy.

7. A schedule attached in the prior years working papers reconciles Retained Earnings and
Accumulated Adjustments Account balances at 12/31/11 as follows:
Balance per Schedule L (Balance Sheet) .................................................... $129,998)
Accumulated depreciation for machinery and equipment (M&E) for tax
M&E Acquired 07/01/10 ............................................... $ 10,252
M&E Acquired 02/01/11 ............................................... 41,206
$51,458
Accumulated depreciation per books .................................. 25,601
Excess of Accumulated Tax over Book Depreciation for M&E ................. (25,857)
Balance per Schedule M (Analysis of the
Accumulated Adjustments Account) ..................................................... $104,141)

8. The balance in the Other Adjustments Account (Form 1120S, p. 5, Sch. M-2, col. (b)) at
the beginning of the year was $-0-.

9. Depreciation information is attached.

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10. Machine #2, purchased on 02/01/11 for $66,096, was sold to an unrelated party on 11/01/12
for $67,418.

11. Machine #1, purchased on 07/01/10 for $26,438, was totally destroyed by severe storm that
flooded the piece of machinery on 04/01/12. Proceeds of $20,490 were received from the
insurance company. On 08/01/12 $19,829 of the proceeds were invested in a replacement
machine. Assume there will be no further qualified reinvestment of the proceeds.

12. Interest expense was on loans for the following purposes:

Purchase M&E ............................................................................................ $7,121
Invest in stock of Thread Corp. ................................................................... 1,189
Invest in Orleans Parish, Louisiana water and sewer bonds ....................... 132
Cover shortage in working capital .............................................................. 6,601
Total ....................................................................................................... $15,043

13. On June 5, 2012, 450 shares of Thread Corp. common stock were sold. The company
bought 1,800 shares of the stock on June 2, 2011 for $7,932. The stock was split 3-for-1 on
February 21, 2012. (Clue: Use the book gain and basis to compute the proceeds.)

14. On May 15, 2011 The Eerie Ensembles Corp. purchased at par $12,240 of Orleans Parish,
Louisiana water and sewer bonds. Interest of $496 was received on the bonds during the
year.
15. Assume that compensation of officers and other salaries and wages do not relate to
production activities. This assumption removes the Domestic Production Activities
deduction from this practice set.

REQUIRED
From the above information, prepare The Eerie Ensembles Corp.s 2012 Federal income tax
return (Form 1120S), including all supporting statements, schedules, and forms. Unless
otherwise noted, assume the corporation makes all available elections to minimize the
shareholders current taxable incomes. Round amounts to the nearest dollar. If additional
information is needed, make realistic assumptions and fill in all required data.

Even though the corporation may not be technically required to do so, Noel has expressed
a desire that Schedule L (Balance Sheets), Schedule M-1 (Reconciliation of Income (Loss)
per Books With Income (Loss) per Return), and Schedule M-2 (Analysis of Accumulated
Adjustments Account, Other Adjustments Account, and Shareholders Undistributed Taxable
Income Previously Taxed) on Form 1120S, p. 5 be completed.

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 The Eerie Ensembles Corp.
Depreciation/Cost Recovery Information
Financial
Depreciation Balance 2012 2012 Balance Balance 2012 2012 Balance
Information 12/31/11 Additions Retirements 12/31/12 12/31/11 Provision Retirements 12/31/12

Machinery
Acquired on:

07/01/10 $ 26,438 ($26,438) $ 0 $ 3,966 $ 1,321 ($5,287) $ 0

02/01/11 288,444 (66,096) 222,348 21,635 25,540 (8,262) 38,913

05/01/12 $129,254 129,254 8,470 8,470

08/01/12 19,829 19,829 734 734

Total $314,882 $149,083 ($92,534) $371,431 $25,601 $36,065 ($13,549) $48,117

TAX DEPRECIATION INFORMATION

MACRS (Modified Accelerated Cost Recovery SystemFor property placed in service after
1986)

Machinery and equipment (7-year statutory life, 200% declining balance switching to
straight line, half-year convention). Statutory percentage for assets placed in service during a
year are 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, 8.92%, 8.93%, and 4.46% for recovery
years 18, respectively. One-half of the normal MACRS amount is allowed for the year of
disposition.

The corporation has elected not to take the additional 30% or 50% depreciation allowance on
assets placed in service prior to 2012 and elects not to take the additional 50% depreciation
for assets placed in service in 2012.

The corporation has not elected Internal Revenue Code Sec. (IRC Sec.) 179 expense in the
past; however, IRC Sec. 179 expense is to be claimed for machinery and equipment placed in
service on 05/01/12.

ALTERNATIVE MINIMUM TAX (Tax Preferences and Adjustments)

For this practice set, ignore effects of the above cost recoveries on the Alternative Minimum
Tax (i.e., leave the applicable spaces blank for these items in the Adjustments and Tax
Preferences Items section of Schedules K and K-1).

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S C O R P O R AT I O N P R AC T I C E S E T

The Eerie Ensembles Corp.

FORMS
Page
Form 1120S
U.S. Income Tax Return for an S Corporation ................................................. 33

Schedule K-1 (Form 1120S) (2 Forms)

Shareholders Share of Income, Credits, Deductions, etc. (2 forms) .............. 38

Form 1125-A

Cost of Goods Sold ........................................................................................... 40

Form 4797
Sales of Business Property ................................................................................ 41

Form 4562
Depreciation and Amortization ......................................................................... 43

Schedule D (Form 1120S)

Capital Gains and Losses and Built-In Gains .................................................... 45

Form 8949
Sales and Other Dispositions of Capital Assets ................................................ 46

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PA RT N E R S H I P P R AC T I C E S E T

Walk Upright Company

Federal Tax Return

FACTS
Walk Upright Company is a partnership owned and operated by Thomas March (social security
number 111-11-1111) and Lucy March (social security number 123-45-6789). The office is
located at 58 Trekkers Point, Fort Collins, Colorado 80521. The partnerships tax identification
number is 12-3456789, and it uses a calendar year for tax purposes. The business was started on
March 5, 2007 to manufacture telescoping aluminum walking and hiking poles. Walking with
these poles makes exercise easier while burning calories at ones own pace. The company also
manufactures white canes used by the seeing impaired. The partnership has prospered and sells
its products throughout the United States on a wholesale basis to retail outlets. Both Thomas and
Lucy are active in the business. The business code number is 339900.

Thomas March is a 70 percent general partner, and Lucy March is a 30 percent general partner
who, among other duties, deals with tax matters for the partnership. Both Thomas and Lucy
devote 100 percent of their time to the business. Thomas lives at 44 Journey Hwy, Fort Collins,
Colorado 80522 and Lucy resides at 90 Rocky Road, Fort Collins, Colorado 80523. Both
partners and the partnership file Federal income tax returns at the IRS Service Center in Ogden,
Utah.

The partnership files its tax return on the accrual method. Inventory has been consistently valued
at cost under the FIFO method using the full absorption procedure. Inventory capitalization rules
of Internal Revenue Code Section 263A do not apply due to the small business exception
(average annual gross receipts for the three preceding taxable years do not exceed $10 million).
The accounting records are computerized.

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The income statement and balance sheet for the current year, prepared by the accounting firm of
Stanley & Livingstone, CPAs, appear below:

WALK UPRIGHT COMPANY

INCOME STATEMENT
For the Year Ending December 31, 2012

Revenue:
Sales (net) .................................................................... $ 875,360)
Cost of goods sold ........................................................ (359,892)
Gross profit ....................................................................................... $ 515,468)
Operating expenses:
Wages to employees .................................................... $ 133,260)
Guaranteed payment to Lucy March ........................... 39,125)
Rental expense ............................................................. 62,175)
Interest expense ............................................................ 23,495)
Advertising ................................................................... 41,315)
Contributions to United Way ....................................... 3,912)
Depreciation expense ................................................... 17,656)
Taxes ............................................................................ 18,083)
Shipping ....................................................................... 23,449)
Repairs and maintenance ............................................. 5,804)
Total operating expenses .................................................................. $(368,274)
Net Income from Operations ............................................................ $ 147,194)
Other incomes and expenses:
Dividend income .......................................................... $ 9,391)
Interest income ............................................................. 3,326)
Interest expense related to investments ....................... (14,976)
Net loss on sale of investments .................................... (6,066)
Net loss on sale of business assets ............................... (16,384) (24,709)
Net Income ........................................................................................ $ 122,485)

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 WALK UPRIGHT COMPANY
STATEMENT OF FINANCIAL POSITION
December 31, 2012
Beginning End
ASSETS of Year of Year
Current Assets:
Cash & Marketable Securities ..................................... $145,047) $141,175)
Accounts Receivable .................................................... 21,128) 30,452)
Inventory ...................................................................... 60,389) 97,979)
Total current assets ................................................ $226,564) $269,606)
Depreciable Assets (Schedule attached) ............................ $264,092) $265,071)
Less: Accumulated depreciation .................................. (35,620) (32,490)
Total depreciable assets (net) ................................. $228,472) $232,581)
Other Assets:
Land (used in the business) .......................................... $146,718) $97,812)
Total Assets ............................................................ $601,754) $599,999)
LIABILITIES AND CAPITAL
Current liabilities:
Accounts payable ......................................................... $ 41,946) $ 28,490)
Notes payable (less than one year) .............................. 185,843) 160,644)
Total current liabilities ........................................... $227,789) $189,134)
Capital:
Thomas March ............................................................. $261,776) $287,606)
Lucy March .................................................................. 112,189) 123,259)
Total capital ........................................................... $373,965) $410,865)
Total Liabilities and Capital .................................. $601,754) $599,999)

STATEMENT OF PARTNERS CAPITAL

Thomas Lucy
March March Total
Capital at beginning of year ................................ $261,776) $112,189) $373,965)
Net income for the year ....................................... 85,739 36,746) 122,485)
Partners Withdrawals ......................................... (59,909) (25,676) (85,585)
Capital at end of year .......................................... $287,606) $123,259) $410,865)

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ADDITIONAL INFORMATION
1. Dividend income is from the following sources:
Gait Corporation .......................................................................................... $5,282
Nordic Corp. ................................................................................................ 1,931
Cane Corp. ................................................................................................... 2,178
Total ....................................................................................................... $9,391
Gait Corporation is located in London, England. You learn that English law requires an
income tax withholding at the rate of 10% on such remittances outside that country.
Assume that all of the dividends received are qualifying dividends for purposes of the
5%/15% tax rates.

2. Interest Income includes $1,760 received on City of Fort Collins, Colorado General
Obligation bonds. Walk Upright Companys employees have been unable to locate a Form
1099 for the interest.

3. Depreciation/Cost Recovery information is attached.

4. On April 5, 2012 a loss of $6,066 was suffered on the sale of 120 shares of common stock
of Stick, Inc. The stock, purchased on November 21, 2007 for $7,825, had been held for
investment. This sale was reported on Form 1099-B with stock basis reported. After
considering the sale, Thomas convinced himself that the sale had been premature because
this companys record could only improve. Thomas had the partnership repurchase 30
shares of Stick, Inc. common stock on April 26, 2012 for $2,720 and purchase 100 shares of
Pole, Inc. common stock on June 6, 2012 for $6,104.

5. Several business assets were sold during the year. A schedule attached to the partnerships
financial statements provides these details:
Sales Accumulated Financial
Asset Date Sold Price Cost Depreciation Gain (Loss)
Land * 03/12/12 $39,123 $48,906 $ 0 $(9,783)
Building * 03/12/12 26,421 29,344 4,646 1,723)
M&E (Acq. 2008) ** 04/20/12 4,891 29,343 11,738 (12,714)
M&E (Acq. 2010) ** 04/20/12 19,550 19,562 4,402 4,390)
Totals $89,985 $127,155 $20,786 $(16,384)

* The land and buildings were sold to Thomas March for independently appraised fair
market values. Both assets were acquired on 10/01/07.
** All machinery and equipment disposed of during the year was sold to an unrelated third
party.

6. The partners wish to claim foreign tax credits for the English income tax withheld on the
dividends from the English corporation.

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 7. Investment interest expense is for:
Loan to buy City of Fort Collins, Colorado bonds ...................................... $2,445
Loan to buy Metal Corp. stock .................................................................... 4,793
Loan to buy Dicks Sporting Goods Corp. stock ........................................ 7,738
Total ....................................................................................................... $14,976

8. All liabilities of the partnership are recourse loans, and all notes payable were issued at par
and provide market interest rates.

REQUIRED
From the above information, prepare Walk Upright Companys 2012 Federal partnership return
of income (Form 1065), including all supporting statements, schedules, and forms. Schedules K-
1 for each of the partners should be in the return. Unless otherwise noted, assume the partnership
makes all available elections to minimize the partners current taxable incomes. Round amounts
to the nearest dollar. If additional information is needed, make realistic assumptions and fill in
all required data.

Even though the partnership may not be technically required to do so, Thomas has expressed a
desire that Schedule L (Balance Sheets), Schedule M-1 (Reconciliation of Income (Loss) per
Books With Income (Loss) per Return), and Schedule M-2 (Analysis of Partners Capital
Accounts) on Form 1065, p. 5 be completed.

Walk Upright Company

Depreciation/Cost Recovery Information
2012
Financial
Depreciation Balance 2012 2012 Balance Balance 2012 2012 Balance
Information 12/31/11 Additions Retirements 12/31/12 12/31/11 Provision Retirements 12/31/12

Buildings
Acquired on:

10/01/07 $ 29,344 ($29,344) $ 0 $ 4,157 $ 489 ($ 4,646) $ 0

10/01/08 117,374 117,374 12,715 3,913 16,628

$146,718 $ 0 ($29,344) $117,374 $16,872 $ 4,402 ($ 4,646) $16,628

Continued

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Financial
Depreciation Balance 2012 2012 Balance Balance 2012 2012 Balance
Information 12/31/11 Additions Retirements 12/31/12 12/31/11 Provision Retirements 12/31/12

Machinery
Acquired on:

06/01/08 $ 29,343 ($29,343) $ 0 $ 10,270 $ 1,468 ($ 11,738) $ 0

03/01/10 39,125 (19,562) 19,563 6,847 2,934 (4,402) 5,379

08/01/11 48,906 48,906 1,631 4,891 6,522

04/01/12 79,228 79,228 3,961 3,961

$ 117,374 $79,228 ($48,905) $147,697 $18,748 $13,254 ($16,140) $15,862

$264,092 $79,228 ($78,249) $265,071 $35,620 $17,656 ($20,786) $32,490

TAX DEPRECIATION INFORMATION (Use general statutory percentages below)

MACRS (Modified Accelerated Cost Recovery SystemFor property placed in service after
1986)

Nonresidential real property (39-year statutory life, straight line, mid-month convention).
Statutory percentages for assets placed in service in October are .535% for recovery year 1,
2.564% for years 239, and 2.033% for year 40. (Note: The percentages are grouped for ease
of presentation; the actual percentage for a year may differ by .001% from the rates shown.)

Machinery and equipment (7-year statutory life, 200% declining balance switching to
straight line, half-year convention). Statutory percentage for assets placed in service during a
year are 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, 8.92%, 8.93%, and 4.46% for recovery
years 18, respectively. One-half of the normal MACRS amount is allowed for the year of
disposition. The partnership did not claim Internal Revenue Code Sec. (IRC Sec.) 179
expense for assets placed in service prior to 2012. The partnership elected not to take the
additional 30% or 50% depreciation allowance for assets placed in service prior to 2012.
The full allowable IRC Sec. 179 expense of $79,228 is claimed for machinery and equipment
placed in service during 2012.

ALTERNATIVE MINIMUM TAX (Tax Preferences and Adjustments)

For this practice set, ignore effects of the above cost recoveries on the Alternative Minimum
Tax (i.e., leave the applicable spaces blank for these items in the Adjustments and Tax
Preferences Items section of Schedules K and K-1).

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PA RT N E R S H I P P R AC T I C E S E T

Walk Upright Company

FORMS
Page
Form 1065
U.S. Partnership Return of Income ................................................................... 57

Form 1125-A
Cost of Goods Sold ........................................................................................... 62

Form 4797
Sales of Business Property ................................................................................ 63

Form 4562
Depreciation and Amortization ......................................................................... 65

Form 8949
Sales and Other Dispositions of Capital Assets ................................................ 67

Schedule B-1 (Form 1065)

Information on Partners Owning 50% or More of the Partnership ................... 69

Schedule D (Form 1065)

Capital Gains and Losses .................................................................................. 70

Schedule K-1 (Form 1065)

Partners Share of Income, Deductions, Credits, etc. ....................................... 71

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