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 $122,000 and equipment valued at $124,000 as well as $44,000 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 10 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 $5,000, 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 $50,000 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 $92,000. 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 $101,000 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. 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. 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. This is the last question in the assignment. To submit, use Alt + S. To access other questions, proceed to the question map button.

Answer 1

No	Date	General Journal	Debit	Credit
1	1/1/2016	Building a/c dr.	122,000
		Equipment a/c dr.	124,000
		Cash a/c dr.	44,000
		Goodwill a/c dr.	290,000
		To Rob O’Donnell a/c		290,000
		To Reese a/c		290,000
		(record of initial payments of partners)
2	12/31/16	Reese capital ()	44,000
		To Rob O’Donnell capital (290,000*10%)+5,000		34,000
		To Income Summary		10,000
		(net income distribution)
3	1/1/17	Cash a/c dr.	50,000
		Goodwill a/c dr.	92,500
		Dunn. capital		142,500
		(admittance of Dunn as partner)
4	12/31/17	Rob O’Donnell capital (290,000+34,000)*10%	32,400
		Reese capital (290,000-44,000)*10%	24,600
		Dunn. capital (142,500*10%)	14,250
		Rob O’Donnell drawings		32,400
		Reese drawings		24,600
		Dunn drawings		14,250
		(drawing accounts closed)
5	12/31/17	Income summary a/c dr.	92,000
		Rob O’Donnell capital		50,800
		Reese capital		24,720
		Dunn capital		16,480
		Distribution of net income
6	1/1/17	Goodwill (145000-143730)/32*	3969
		To Rob O’Donnell capital (3969*20%)		794
		To Resse Capital (3969*48%)		1905
		To Dunn Capital (3969*32%)		1270
		(Goodwill indication)
7	1/1/18	Dunn Capital	145,000
		Postner Capital		145,000
		(admittance of Postner partnership)
8	12/31/18	Rob O’Donnell capital (342400+794)*10%	34319
		Reese Capital (334120+1905)*10%	33603
		Dunn Capital (143730+1270)*10%	14500
		Rob O’Donnell drawings		34319
		Reese drawings		33603
		Dunn drawings		14500
		(drawings account closed)
9	12/31/18	Income summary	10100
		Rob O’Donnell capital		54519
		Reese Capital		27889
		Dunn capital		18592
		(distribution of net income)
10	1/1/19	Goodwill (126408*10%)/32%	39502
		Rob O’Donnell capital(20%)		7900
		Reese Capital(48%)		18960
		Dunn capital(32%)		12640
		(Goodwill withdrawl of Postner)
11	1/1/19	Postner capital	139049
		Cash (126408*(1+10%))		139049
		To record final distribution to Postner