Roberto and Reagan are both 25 percent owner/managers for Bright Light Enterprises. Roberto runs the retail store in Sacramento, CA, and Reagan runs the retail store in San Francisco, CA. Bright Light generated a $125,000 profit companywide made up of a $75,000 profit from the Sacramento store, a ($25,000) loss from the San Francisco store, and a combined $75,000 profit from the remaining stores. If Bright Light is taxed as a partnership and decides that Roberto and Reagan will be allocated 70 percent of his own store's profit with the remaining profits allocated pro rata among all the owners, how much income will be allocated to Reagan?
A) ($25,000)
B) ($17,500)
C) $5,000
D) $20,000

Question

Quizplus · Accepted Answer

Because Bright Lights Enterprises is a partnership, the special allocation described is permissible. Reagan would receive 70 percent of the loss from his store, or ($17,500) ($25,000 × 70 percent). Additionally, Reagan will receive 25 percent of the remaining profits not specially allocated, or $22,500 [0.25 × (125,000 + 17,500 − ($75,000 × 0.70))]. Thus, Reagan will be allocated a total of $5,000 of income.

Roberto and Reagan Are Both 25 Percent Owner/managers for Bright