Using the information provided below, complete Bent Creek Dental’s Form 1065 and Schedule D. Also complete Josh Mathis and Mary Margaret Mathis’s Schedule K-1.

Partnership Tax Return Information:




Using the information provided below, complete Bent Creek Dental’s Form 1065 and Schedule D. Also complete Josh Mathis and Mary Margaret Mathis’s Schedule K-1.

Form 4562 for depreciation is not required. Use the amount of tax depreciation and sec. 179 expense provided in the income statement and the information in #4 below to complete the appropriate lines on the first page of Schedule K of Form 1065.

Form 4797 for the sale of trade or business property is not required. Use the amount of gain and loss from the sale of the computers and furniture in the income statement and the information provided in #4 and #5 below to complete the appropriate lines on the first page of Schedule K of Form 1065.

If any information is missing, use reasonable assumptions to fill in any gaps.

The forms, schedules, and instructions can be found at the IRS website ( The instructions can be helpful in completing the forms.



On January 1, 2009, two enterprising dentists in the community, Josh Mathis and Mary Margaret Mathis, anticipated a boom in the local dental industry. They decided to sell their small businesses and pool their resources as general partners in establishing a dental office. Their general partnership was officially formed under the name Bent Creek Dental and soon became a thriving business.

BCD is located at 2311 Bent Creek Rd, Ste 500, Auburn, AL 36830

BCD’s Employer Identification Number is 91-3697984.

BCD’s business activity is dentistry. Its business activity code is 621210.

Both general partners are active in the management of BCD.

Josh Mathis’s social security number is 500-23-4976.

Josh’s address is 31 W. Oak Drive, Auburn, AL 36830

Mary Margaret Mathis’s social security number is 374-68-3842.

Mary Margaret’s address is 947 E. Linder Street, Auburn, AL 36830

BCD uses the accrual method of accounting and has a calendar year-end.



The following is BCD’s 2019 income statement:

BCD Income Statement
For the year ended December 31, 2019
Sales (on account) $600,000
Less: Sales Returns -20,000
Cost of goods sold -160,000
Gross profit on sales $420,000
Operating expenses:
Salaries and wages
(including partners’
guaranteed payments) $95,000
Property taxes 1,800
Payroll taxes 3,450
Depreciation and 179 expense 43,335
Advertising 2,500
Bad debt expense 4550
Office expense 1,900
Repairs 1,850
Miscellaneous 430
Fire insurance 4,650 159,465
Net operating income $260,535
Other income:
Gain on sale of securities $250
Gain on sale of computers 16,700
Dividend income 495
Interest income 4,660 22,105
Other deductions:
Interest on mortgage $6,600
Interest on notes payable 3,250
Charitable contributions 5,200
Life insurance premiums 3,500
Loss on sale of office furniture 555 $19,105
NET INCOME $263,535



  1. The partnership maintains its books according to IRC Sec. 704(b) regulations. Under this method of accounting, all book and tax numbers are the same except for life insurance premiums and tax-exempt interest.
  2. The partners’ percentage ownership of original contributed capital is 30 percent for Josh and 70 percent for Mary Margaret. They agree that profits and losses will be shared according to this same ratio. Any additional capital contributions and withdrawals must be made in these same ratios.
  3. For their services to the company, the partnerships receive the following annual guaranteed payments:

Josh Mathis                                        $32,000

Mary Margaret Mathis                   $18,000


  1. Two pieces of office furniture sold in September 2019. The old furniture was purchased new four years ago. Two new pieces of office furniture were purchased on September 1, 2019 for $26,321 and the partnership intends to immediately expense them under Sec. 179 (see depreciation and 179 in the income statement above).
  2. The computers sold this year was purchased several years ago. $16,500 of the total gain from the sale of the computers should be recaptured as ordinary income under IRC Sec. 1245.
  3. The partnership uses currently allowable tax depreciation methods for both regular tax and book purposes and has adopted a policy of electing not to claim bonus depreciation. Assume alternative minimum tax depreciation equals regular tax depreciation.
  4. The partners decided to invest in a small tract of land with the intention of selling it about a year later at a substantial profit. On January 1, 2019, they executed a $55,000 note with the bank to obtain the $75,000 cash purchase price. Interest on the note is payable yearly, and the principal is due in 18 months. The first interest payment of $3,250 was made on December 30, 2019 (see interest on notes payable in income statement above).
  5. The note payable to the bank as well as the accounts payable are treated by the partnership as recourse debt. Assume the total recourse debt is allocated $22,500 to Josh and $52,500 to Mary Margaret.
  6. Some years after the partnership was formed, a mortgage of $114,500 was obtained on the land and building from Commerce State Bank. Principal payments of $5,500 must be paid each December 31, along with interest on the outstanding balance (see interest on mortgage income statement above). The holder of the note agreed therein to look only to the land and building for his security in the event of default.
  7. The partnership values its inventory at lower of cost or market and uses the FIFO inventory method. Assume the rules of Sec. 263A do not apply to BCD.
  8. During the year, the partnership bought 300 shares of JKL, Ltd., for $6,650 on February 8, 2019. All the shares were sold for $6,100 on April 2, 2019. ABS received a Form 1099-B indicating that the basis of the JKL shares was reported to the IRS.
  9. Two hundred shares of QRS Corporation were sold for $8,300 on September 13, 2019. The stock was purchased on December 1, 2013 and is not eligible for the 28 percent capital gains rate. BCD reported a Form 1099-B indicating that the basis of the QRS shares was reported to the IRS.
  10. The following dividends were received:

QRS (qualified)                                 $300

JKL, Ltd. (not qualified)                 195

Total                                                      $495

  1. The partnership received interest income from the following sources:

Interest on Alabama municipal bonds   $3,600

Interest on savings                                         660

Interest on accounts receivable                                400

Total                                                                      $4,660

  1. The partnership donated $5,200 cash to the Red Cross.
  2. Life insurance policies on the lives of Josh and Mary Margaret were purchased in the prior year. The partnership will pay all the premiums and is the beneficiary of the policy. The premiums for the current year were $3,500 (see income statement above) and no cash surrender value exists for the first or second year of the policy.
  3. The partners withdrew the following cash amounts from the partnership during the year (in addition to the guaranteed payments):

Josh                       $28,748

Mary Margaret  $49,112

The following are BCD’s balance sheets as of Janaury 1, 2019 and December 31, 2019:

BCD Balance Sheets
      12/31/2019         1/1/2019
Cash $170,466 $43,042
Accounts receivable 76,000 57,000
Inventories 60,000 50,000
Investment in municipal bonds 50,000 50,000
Investment in QRS common stock 42,500 50,000
Computers $16,500
Less: Accum. Depr. 13,649
Office Furniture $68,000 $50,000
Less: Accum. Depr. 60,697 7,303 34,376 15,624
Building $120,000 $120,000
Less: Accum. Depr. 39,874 80,126 36,798 83,202
Land 90,000 15,000
TOTALS $576,395 $366,719
  Liabilities and capital          
Accounts payable $20,000 $45,500
Notes payable 55,000
Mortgage payable 62,000 67,500
Josh Mathis 132,353 82,040
Mary Margaret Mathis 307,042 171,679
TOTALS $576,395 $366,719


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