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 $128,000 and equipment valued at $136,000 as well as $56,000 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 15 percent of partnership income each year (without regard for the preceding interest figure) or $8,000, 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 20 percent of the beginning capital balance for the year, whichever is larger.

The partnership reported a net loss of $10,000 during the first year of its operation. On January 1, 2017, Terri Dunn becomes a third partner in this business by contributing $60,000 cash to the partnership. Dunn receives a 20 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 $98,000. 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 $145,000 directly to Dunn. Net income for 2018 is $115,000 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.

1. 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.

• 1-Record the initial investment of assets by partners.

• 2-Record the distribution of net income to partners.

• 3-Record the admittance of Dunn into the partnership.

• 4-Record entry to close drawings accounts.

• 5-Record the distribution of net income to partners.

• 6-Record the goodwill indicated by the purchase of Dunn's interest.

• 7-Record the admittance of Postner into the partnership

• 8-Record entry to close drawings accounts.

• 9-Record the distribution of net income to partners.

• 10-Record the goodwill indicated by the withdrawal of Postner.

• 11-Record the final distribution to Postner.

Please help have been struggling with the question for hours!

Please number all journal entries for clarity.

Account titles: a/p, a/r, building, cash, dunn capital, dunn drawings, equipment, income summary, interest expense, interest income, interest payable, interest receivable, o'donnell capital, o'donnell drawings, postner capital, postner drawings, reese capital, reese drawings, if no journal entry is required please specify

Answer 1

Journal entries

Entry No.	Date	Account Title	Ref No.	Debit ($)	Credit ($)
1	1-1-2016	Building		$ 128,000
		Equipment		$ 136,000
		Cash		$ 56,000
		Goodwill		$ 320,000
		O' Donneel, Capital			$320,000
		Reesee, Capital			$ 320,000
2	12-31-2016	Reesee, Capital		$ 82,000
		O' Donneel, Capital			$ 72,000
		Income Summary			$ 10,000
3	1-1-2017	Cash		$ 60,000
		Goodwill		$ 97,500
		Dunn, Capital			$ 157,500
4	12-31-2017	O' Donneel, Capital		$78,400
		Reesee, Capital		$47,600
		Dunn, Capital		$31,500
		O' Donnel, Drawings			$78,400
		Reesee, Drawings			$47,600
		Dunn, Capital			$31,500
5	12-31-2017	Income Summary		$98,000
		O'Donnel, Capital			$93,100
		Reesee, Capital			$ 2,940
		Dunn, Capital			$ 1,960
6	1-1-2018	Goodwill		$53250
		O' Donnell, Capital			$ 10,650
		Reesee, Capital			$ 25,560
		Dunn, Capital			$ 17,040
7	1-1-2018	Dunn, Capital		$145,000
		Postner, Capital			$ 145,000
8	10-31-2018	O' Donnell, Capital		$83,470
		Reesee, Capital		$43,780
		Dunn, Capital		$29,000
		O' Donnell, Drawings			$83,470
		Reesee, Drawings			$43,780
		Dunn, Drawings			$29,000
9	12-31-2018	Income Summary		$115,000
		O'Donnell, Capital			$100,720
		Reesee, Capital			$8,568
		Postner Capital			$5,712
10	1-1-2019	Goodwill		$38,034
		O' Donnell, Capital			$ 7,607
		Reesee, Capital			$18,256
		Postner, Capital			$12,171
11	1-1-2019	Postner, Capital		$133,883
		Cash			$133,883

Working notes is as follows