Glen and Michael Are Equal Partners in Trout Enterprises, a Calendar

question 102

Multiple Choice

Glen and Michael are equal partners in Trout Enterprises, a calendar year partnership. During the year, Trout Enterprises had gross income of $400,000 and operating expenses of $220,000. In addition, the partnership sold land that had been held for investment purposes for a long-term capital gain of $100,000. During the year, Glen withdrew $60,000 from the partnership, and Michael withdrew $60,000. Discuss the impact of this information on the taxable income of Trout, Glen, and Michael.

• A) Trout pays tax on $0 income, Glen's taxable income increases by $60,000, and Michael's taxable income increases by $60,000.
• B) Trout pays tax on $280,000 income, Glen's taxable income increases by $60,000, and Michael's taxable income increases by $60,000.
• C) Trout pays tax on $0 income, Glen's taxable income increases by $200,000, and Michael's taxable income increases by $200,000.
• D) Trout pays tax on $0 income, Glen's taxable income increases by $140,000, and Michael's taxable income increases by $140,000.
• E) None of the above.

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Definitions:

Contribution Margin

The difference between the sales revenue of a company and its variable costs.

Break-even Sales

Break-even sales refer to the amount of revenue required to cover all fixed and variable costs, resulting in zero profit or loss.

Selling Price

The amount of money a buyer pays to acquire a product or service.

Fixed Costs

Expenses that do not change in total regardless of changes in the level of production or sales activities within a certain range.