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 SOLVE #6 and #8

Answer 1

No.	Date	General journal	Debit	Credit
1	1/1/16	Building	120000
		Equipment	120000
		Cash	40000
		Goodwill	280000
		O'Donnell, Capital		280000
		Reese, Capital		280000
		(To record initial investment of assets by partners)
2	12/31/16	Reese, Capital	69000
		O'Donnell, Capital (280000*10%)+4000		60000
		Income Summary		9000
		(To record the distribution of net income to partners)
3	1/1/17	Cash	53000
		Goodwill	130667
		Dunn, Capital		183667
		(To record the admittance of Dunn into the partnership)
4	12/31/17	O'Donnell, Capital (280000+60000)*10%	34000
		Reese, Capital (280000-69000)*10%	21100
		Dunn, Capital (183667*10%)	18367
		O'Donnell, Drawings		34000
		Reese, Drawings		21100
		Dunn, Drawings		18367
		(To record entry to close drawings account)
5	12/31/17	Income Summary	90000
		O'Donnell, Capital		86000
		Reese, Capital		2400
		Dunn, Capital		1600
		(To record the distribution of net income to partners)
6	1/1/18	Goodwill (180000-166900)/32%	40938
		O’Donnell Capital (40938*20%)		8188
		Reese, Capital (40938*48%)		19650
		Postner, Capital (40938*32%)		13100
		(To record the goodwill indicated by the purchase of Dunn’s interest)
7	1/1/18	Dunn, Capital	180000
		Postner, Capital		180000
		(To record the admittance of Postner into the partnership)
8	12/31/18	O'Donnell, Capital ((392000+8188)*10%)	40019
		Reese, Capital ((192300+19650)*15%)	21195
		Postner, Capital (180000*10%)	18000
		O'Donnell, Drawings		40019
		Reese, Drawings		21195
		Postner, Drawings		18000
		(To record entry to close drawings account)

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 $69000 loss is assigned to Reese.)

1/1/17

Current capital = total capital by two partners – net loss = 280000+280000-9000 = 551000

53000+goodwill = 25%*(current capital+53000+goodwill)

53000+goodwill= 25%*(551000+53000+goodwill)

53000+goodwill =25%*(604000+goodwill)

53000+goodwill=151000*0.25goodwill

0.75 goodwill = 98000

Goodwill = 130667

Dunn contributes cash and goodwill.

Net income distribution

	O'Donnell	Reese	Dunn
Interest (20% of $((280000+60000)) beginning capital balance)	68000
20% of $90000 income	18000
60:40 spilt of remaining $4000 (90000-68000-18000) Income		2400	1600
Total	86000	2400	1600

Capital Balances as of December 31, 2017:

	O'Donnell	Reese	Dunn
Initial 2016 investment	280000	280000
2016 net loss allocation	60000	(69000)
Dunn's investment			183667
2017 drawings	(34000)	(21100)	(18367)
2017 net income allocation	86000	2400	1600
12/31/17 balances	392000	192300	166900

In effect, profits are shared 20% to O'Donnell, 48% to Reese – (60% of the 80% remaining after O'Donnell's income), and 32% to Dunn (40% of the 80% remaining after O'Donnell's income).

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