Question

Steve Reese is a well-known interior designer in Fort Worth, Texas. He wants to start his own business and convinces Rob O'Donnell, a local merchant, to contribute the capital to form a partnership. On January 1, 2016, O'Donnell invests a building worth $120,000 and equipment valued at $120,000 as well as $40,000 in cash. Although Reese makes no tangible contribution to the partnership, he will operate the business and be an equal partner in the beginning capital balances. To entice O'Donnell to join this partnership, Reese draws up the following profit and loss agreement: • O'Donnell will be credited annually with interest equal to 20 percent of the beginning capital balance for the year. • O'Donnell will also have added to his capital account 20 percent of partnership income each year (without regard for the preceding interest figure) or $4,000, whichever is larger. All remaining income is credited to Reese. Neither partner is allowed to withdraw funds from the partnership during 2016. Thereafter, each can draw $7,000 annually or 10 percent of the beginning capital balance for the year, whichever is larger. The partnership reported a net loss of $9,000 during the first year of its operation. On January 1, 2017, Terri Dunn becomes a third partner in this business by contributing $53,000 cash to the partnership. Dunn receives a 25 percent share of the business's capital. The profit and loss agreement is altered as follows: • O'Donnell is still entitled to (1) interest on his beginning capital balance as well as (2) the share of partnership income just specified. . Any remaining profit or loss will be split on a 6:4 basis between Reese and Dunn, respectively. Partnership income for 2017 is reported as $90,000. Each partner withdraws the full amount that is allowed. On January 1, 2018, Dunn becomes ill and sells her interest in the partnership (with the consent of the other two partners) to Judy Postner. Postner pays $180,000 directly to Dunn. Net income for 2018 is $150,000 with the partners again taking their full drawing allowance. On January 1, 2019, Postner withdraws from the business for personal reasons. The articles of partnership state that any partner may leave the partnership at any time and is entitled to receive cash in an amount equal to the recorded capital balance at that time plus 10 percent. a. Prepare journal entries to record the preceding transactions on the assumption that the bonus (or no revaluation) method is used. Drawings need not be recorded, although the balances should be included in the closing entries. b. Prepare journal entries to record the previous transactions on the assumption that the goodwill (or revaluation) method is used. Drawings need not be recorded, although the balances should be included in the closing entries.

PLEASE HELP ME FIGURE OUT WHAT I'M DOING WRONG

Answer 1

Part A

Date	Account titles and explanation	debit	Credit
1/1/16	Building	120000
	Equipment	120000
	Cash	40000
	O'Donnell, Capital		140000
	Reese, Capital		140000
12/31/16	Reese, Capital	36000
	O'Donnell, Capital (140000*20%)+4000		32000
	Income Summary		4000
1/1/17	Cash	53000
	O'Donnell, Capital (20%)	5000
	Reese, Capital (80%)	20000
	Dunn, Capital		78000
12/31/17	O'Donnell, Capital (140000+32000-5000)*10%	16700
	Reese, Capital (140000-36000-20000)*10%	8400
	Dunn, Capital (78000*10%)	7800
	O'Donnell, Drawings		16700
	Reese, Drawings		8400
	Dunn, Drawings		7800
12/31/17	Income Summary	90000
	O'Donnell, Capital		51400
	Reese, Capital		23160
	Dunn, Capital		15440
1/1/18	Dunn, Capital	85640
	Postner, Capital		85640
12/31/18	O'Donnell, Capital (201700*10%)	20170
	Reese, Capital (98760*10%)	9876
	Postner, Capital (85640*10%)	8564
	O'Donnell, Drawings		20170
	Reese, Drawings		9876
	Postner, Drawings		8564
12/31/18	Income Summary	90000
	O'Donnell, Capital		48038
	Reese, Capital		25177
	Postner, Capital		16785
1/1/19	Postner, Capital (85640-8564+16785)	93861
	O'Donnell, Capital (20%)	1877
	Reese, Capital (80%)	7509
	Cash		103247

Part B

Date	Account titles and explanation	debit	Credit
1/1/16	Building	120000
	Equipment	120000
	Cash	40000
	Goodwill	280000
	O'Donnell, Capital		280000
	Reese, Capital		280000
12/31/16	Reese, Capital	64000
	O'Donnell, Capital		60000
	Income Summary		4000
1/1/17	Cash	53000
	Goodwill	131333
	Dunn, Capital		184333
12/31/17	O'Donnell, Capital (280000+60000)*10%	34000
	Reese, Capital (280000-64000)*10%	21600
	Dunn, Capital (184333*10%)	18433
	O'Donnell, Drawings		34000
	Reese, Drawings		21600
	Dunn, Drawings		18433
12/31/17	Income Summary	90000
	O'Donnell, Capital		75800
	Reese, Capital		2520
	Dunn, Capital		1680

Date	Account titles and explanation	debit	Credit
12/31/17	O'Donnell, Capital (280000+60000)*10%	34000
	Reese, Capital (280000-64000)*10%	21600
	Dunn, Capital (184333*10%)	18433
	O'Donnell, Drawings		34000
	Reese, Drawings		21600
	Dunn, Drawings		18433
12/31/17	Income Summary	90000
	O'Donnell, Capital		86000
	Reese, Capital		2400
	Dunn, Capital		1600
1/1/18	Goodwill (180000-167500)/32%	39063
	O’Donnell Capital (20%)		7813
	Reese, Capital (48%)		18750
	Postner, Capital (32%)		12500
1/1/18	Dunn, Capital	180000
	Postner, Capital		180000
12/31/18	O'Donnell, Capital	34781
	Reese, Capital	23475
	Postner, Capital	18000
	O'Donnell, Drawings ((340000+7813)*10%)		34781
	Reese, Drawings ((216000+18750)*10%)		23475
	Postner, Drawings (180000*10%)		18000
12/31/18	Income Summary	90000
	O'Donnell, Capital		80646
	Reese, Capital		5612
	Postner, Capital		3742
1/1/19	Goodwill (194675*10%)/32%	60836
	O'Donnell, Capital (20%)		12167
	Reese, Capital (48%)		29201
	Postner, Capital (32%)		19468
1/1/19	Postner, Capital ((194675*110%)	214143
	Cash		214143

Explanation:

Part A

1/1/16 - To record initial investment of assets by partners. Assets recorded at fair value with two equal capital balances

12/31/16 - The allocation plan specifies that O'Donnell will receive 20% in interest [or $28000 based on $140,000 capital balance] plus $4,000 more [since that amount is greater than 15% of the profits from the period]. The remaining $36000 loss is assigned to Reese.)

1/1/17 - New investment by Dunn brings total capital to $312,000 after 2008 loss [$280,000 – $4,000 + $36,000]. Dunn's 20% interest is $78000 [$312,000 × 25%] with the extra $25000 coming from the two original partners [allocated between them according to their profit and loss ratio].

12/31/17 - To close out drawings accounts for the year based on distributing 10% of each partner's beginning capital balances or 7000 whichever is more

Net income distribution

	O'Donnell	Reese	Dunn
Interest (140000+32000-5000)*20%	33400
20% of $90000 income	18000
60:40 spilt of remaining $38600 (90000-33400-18000) Income		23160	15440
Total	51400	23160	15440

Capital Balances as of December 31, 2017:

	O'Donnell	Reese	Dunn
Initial 2016 investment	140000	140000
2016 profit allocation	32000	(36000)
Dunn's investment	(5000)	(20000)	78000
2017 drawings	(16700)	(8400)	(7800)
2017 profit allocation	51400	23160	15440
12/31/17 balances	201700	98760	85640

1/1/18 -Reclassification of capital balance to reflect acquisition of Dunn's interest

12/31/18 - To close out drawings accounts for the year based on distributing 10% of each partner's beginning capital balances or 7000 whichever is more.

12/31/18 - To allocate net income for 2018 determined as follows

	O'Donnell	Reese	Postner
Interest (20% of $201700 beg. capital)	40340
20% of $150000 income	30000
60:40 split of remaining $79660 (150000-40340-30000)		47796	31864
Totals	70340	47796	31864

1/1/19 - Postner's capital = 93861 (85640-8564+16785). Extra 9386 (10%*93861) payment is deducted from the two remaining partners' capital accounts in ratio of 20%:80%

O'Donnell, Capital = 20%*9386 =1877

Reese, Capital = 80%*9386= 7509

Part B

1/1/16- Reese is credited with goodwill of $280,000 to match O'Donnell's investment.

12/31/16 - The allocation plan specifies that O'Donnell will receive 20% in interest [or $56000 based on $280,000 capital balance] plus $4,000 more [since that amount is greater than 10% of the profits from the period]. The remaining $64000 loss is assigned to Reese.)

1/1/17

Current capital = total capital by two partners – net loss = 280000+280000-4000 = 556000

$53,000 + Goodwill = 25% (Current Capital + $53,000 + Goodwill)

$53,000 + Goodwill = 25% ($556000 + $53,000 + Goodwill)

$53,000 + Goodwill = $151500 + 0.25 Goodwill

0.75 Goodwill = $98500

Goodwill = $131333

Dunn contributes cash and goodwill.

Net income distribution

	O'Donnell	Reese	Dunn
Interest (20% of $(280,000+60000) beginning capital balance)	68000
20% of $90,000 income	18000
60:40 spilt of remaining $4200 (90000-68000-18000) Income		2400	1600
Total	86000	2400	1600