instructions:

1- do Form 1065 (Pages 1 - 5), Schedule D (Capital Gains and Losses), any other required forms (there are some), and any supporting schedules necessary (e.g., other deductions).

2- do a Schedule K-1 for both partners. All sections of each K-1 must be properly completed.

3- do an excel worksheet that reconciles book income to taxable income and separates taxable income into ordinary business income and separately stated items. The first column of calculations in the spreadsheet should be your calculation of book income. The second two columns (a debit column and a credit column) should contain the adjustments needed to reconcile book income to taxable income. These adjustment columns will provide you with the numbers you need to complete Schedule M-1 of Form 1065. The fourth column should be your calculation of taxable income (including both ordinary business income and separately stated items). The fifth and sixth columns should be your calculation of ordinary business income and separately stated items, respectively.

Client Information

Henry Hamster (SSN: 477-11-2222) and Fred Frog (SSN: 477-22-2222) are equal partners in Hamster & Frog Partnership, a general partnership that operates a pet shop in Murfreesboro, Tennessee. Henry and Fred share all items of partnership income, loss, and deduction items equally.

The 2021 income statement for the partnership reflected net income of $52,440. The following information (not necessarily in proper form) was taken from the partnership's financial statements for 2021:

Revenues, Gains & Losses
Sales Revenue	$752,200
Interest on Corporate Bond	1,400
Interest on State of Tennessee Bond	1,800
Dividend Income	3,000
Capital Gain on Sale of Acme Corporation Stock	6,000
Total Revenues, Gains & Losses	764,400

Expenses
Cost of Goods Sold	$ 440,020
Rent on Building & Equipment (Hamster & Frog leases all equipment used in the business and therefore owns no depreciable assets)	57,600
Bad Debt Expense	400
Property and Liability Insurance	4,100
Utilities	10,900
Supplies	6,900
Employee Salaries	90,000
Cash Contribution to Red Cross	10,000
Business Entertainment	8,600
Fine Paid to State of Tennessee for Deception Advertising	2,000
Guaranteed Payment (Paid to Henry Hamster, Managing Partner)	40,000
Office Expenses	6,600
Accounting Fees	3,745
Payroll Taxes	6,885
Advertising	6,500
Interest Paid on Business Loan	9,100
Interest Paid on Loan Used to Purchase State of Tennessee Bonds	1,200
Repairs and Maintenance	7,410
Total Expenses	711,960
Net Income	52,440

Beginning and ending balance sheet information is as follows:

Assets		January 1, 2021		December 31, 2021
Cash		$36,600		$48,840
Accounts Receivable	38,600		38,000
Allowance for Doubtful Accounts	(1,400)	37,200	_(1,200)	36,800
Inventory		67,200		65,800
Investments (Including $20,000 of Tennessee bonds owned for the entire year)		70,000		66,000
Total assets		$211,000		$217,440
Liabilities and Equity		January 1, 2021		December 31, 2021
Accounts payable		51,000		$41,000
Loan used to Purchase State of Tennessee Bonds (Due in full five months)		12,000		12,000
Business Loan (Due in Two Years)		100,000		100,000
Capital, Henry Hamster		24,000		32,220
Capital, Fred Frog		24,000		32,220
Total liabilities and equity		$211,000		$217,440

Additional information on Hamster & Frog Partnership is set forth below:

Hamster & Frog Partnership sells pets and pet supplies at retail. It does business under the name "Hamster and Frog Pet Shop." Hamster & Frog Partnership's Federal I.D. number is 82-4926867. The partnership uses the accrual method of accounting and the calendar year for reporting purposes. It began business operations on January 1, 2008. Its current address is 200 Companion Street, Murfreesboro, TN 37132.

As required by generally accepted accounting principles, Hamster & Frog Partnership uses the allowance method of accounting for bad debts for financial accounting purposes. It began 2021 with a $1,400 credit balance in the allowance account. During 2021 it wrote off a $600 account receivable as uncollectible. Based on Hamster & Frog Partnership's year-end accounts receivable, the independent auditors determined that a $400 addition to the bad debt allowance was necessary. As a result, the year-end balance in the allowance decreased to $1,200.

Hamster & Frog Partnership maintains inventory and reports it as part of its income tax return. Hamster & Frog Partnership uses the cost method for valuing inventory. It is not subject to the provisions of 263A and did not change its inventory accounting method during the year. Hamster & Frog Partnership made $438,620 of purchases in 2021. No other costs are allocated to cost of goods sold. Hamster & Frog Partnership classifies all employee salaries as an ordinary expense.

Hamster & Frog Partnership sold 10 shares of Acme Corporation stock on March 1, 2021 for $10,000. Hamster & Frog Partnership purchased the Acme Corporation stock on October 2, 2011 for 4,000. This information (including basis) was properly reported on Form 1099-B.

All of the $3,000 of dividend income Hamster & Frog Partnership received is qualified dividend income (eligible for the preferential tax rate).

Henry Hamster received a guaranteed payment of $40,000 for managing the store. Fred Frog did not receive a guaranteed payment.

Fred and Henry each withdrew $18,000 (total distributions were $36,000) during the year as a distribution (draw) of operating profits.

Both the business loan and the loan used to purchase Tennessee bonds are recourse debts. The business loan is classified as long-term and the loan used to purchase Tennessee bonds is classified as short-term. The partners share equally in all partnership liabilities. The partners are considered "active" for purposes of the passive loss rules. Hamster & Frog Partnership accounts for partner capital accounts on a book (GAAP) basis.

None of the partners sold any portion of their interests in the partnership during 2021. The partnership had no foreign operations, no foreign bank accounts, and no interest in any foreign trusts or other partnerships. The partnership is not publicly traded and is not a statutory tax shelter. Henry Hamster services as Hamster and Frog's partnership representative for IRS audit purposes. Henry Hamster lives at 224 Valley View Lane, Murfreesboro, TN 37312. Fred Frog lives at 520 Golden Road, Murfreesboro, TN 37312.