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 $106,000 and equipment valued at $48,000 as well as $46,000 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 $6,000, 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 $8,000 annually or 20 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 $30,000 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 5:5 basis between Reese and Dunn, respectively Partnership income for 2017 is reported as $76,000. 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 $95.000 directly to Dunn. Net Income for 2018 is $73,000 with the partners again taking their full drawing allowance.

Answer 1

	Steav Reese Partnership	Amt in $
a	Bonus method is used
01-01-2016	Building	106000
	Equipements	48000
	Cash	46000
	Steav Reese Capital		100000
	Rob O'Donnel Capital		100000
31-12-2016	Interest	20000
	Rob O'Donnel Capital		20000
31-12-2016	Profit & Loss	6000
	Rob O'Donnel Capital		6000
	(15% of Partnership income or $.6000/- whichever is higher)
31-12-2016	Steav Reese Capital	0
	Rob O'Donnel Capital	0
	Cash		0
	($8000 or 20% of the initial capital whichever is larger)
01-01-2017	Cash	30000
	Steav Reese Capital	7100
	Rob O'Donnel Capital	7100
	Terry Dunn Capital		44200
31-12-2017	Interest	25200
	Rob O'Donnel Capital		25200
	(Interest on Capital at the beginning of the year)
31-12-2017	Profit & Loss	50800
	Steav Reese Capital		19700
	Terry Dunn Capital		19700
	Rob O'Donnel Capital		11400
	(15% of Partnership income of $76000/or $.6000/- whichever is higher)
31-12-2017	Steav Reese Capital	13000
	Rob O'Donnel Capital	25200
	Terry Dunn Capital	8000
	Cash		46200
	($8000 or 20% of the initial capital whichever is larger)
01-01-2018	Terry Dunn Capital	55900
	Judy Postner Capital		55900
	(Being the capital transferred to Judy)
31-12-2018	Interest	26060
	Rob O'Donnel Capital		26060
	(Interest on Capital at the beginning of the year)
31-12-2017	Profit & Loss	46940
	Steav Reese Capital		17995
	Judy Postner Capital		17995
	Rob O'Donnel Capital		10950
	(15% of Partnership income of $73000/or $.6000/- whichever is higher)
31-12-2017	Steav Reese Capital	12920
	Rob O'Donnel Capital	26060
	Judy Postner Capital	11180
	Cash		50160
	($8000 or 20% of the initial capital whichever is larger)
01-01-2019	Judy Postner Capital	62715
	Steav Reese Capital	3136
	Rob O'Donnel Capital	3136
	Cash		68987
	(Withdraws from Partnership with 10% extra)

b	Goodwill method is used
01-01-2016	Building	106000
	Equipements	48000
	Cash	46000
	Goodwill	200000
	Steav Reese Capital		200000
	Rob O'Donnel Capital		200000
31-12-2016	Interest	40000
	Rob O'Donnel Capital		40000
31-12-2016	Profit & Loss	6000
	Rob O'Donnel Capital		6000
	(15% of Partnership income or $.6000/- whichever is higher)
31-12-2016	Steav Reese Capital	0
	Rob O'Donnel Capital	0
	Cash		0
	($8000 or 20% of the initial capital whichever is larger)
01-01-2017	Cash	30000
	Terry Dunn Capital		30000
01-01-2017	Steav Reese Capital	135500
	Rob O'Donnel Capital	135500
	Capital Reserve		271000
31-12-2017	Interest	49200
	Rob O'Donnel Capital		49200
	(Interest on Capital at the beginning of the year)
31-12-2017	Profit & Loss	26800
	Steav Reese Capital		7700
	Terry Dunn Capital		7700
	Rob O'Donnel Capital		11400
	(15% of Partnership income of $76000/or $.6000/- whichever is higher)
31-12-2017	Steav Reese Capital	29000
	Rob O'Donnel Capital	49200
	Terry Dunn Capital	8000
	Cash		86200
	($8000 or 20% of the initial capital whichever is larger)
01-01-2018	Terry Dunn Capital	29700
	Judy Postner Capital		29700
	(Being the capital transferred to Judy)
31-12-2018	Interest	24380
	Rob O'Donnel Capital		24380
	(Interest on Capital at the beginning of the year)
31-12-2017	Profit & Loss	48620
	Steav Reese Capital		18835
	Judy Postner Capital		18835
	Rob O'Donnel Capital		10950
	(15% of Partnership income of $73000/or $.6000/- whichever is higher)
31-12-2017	Steav Reese Capital	-2360
	Rob O'Donnel Capital	24380
	Judy Postner Capital	5940
	Cash		27960
	($8000 or 20% of the initial capital whichever is larger)
01-01-2019	Judy Postner Capital	42595
	Steav Reese Capital	2130
	Rob O'Donnel Capital	2130
	Cash		46855
	(Withdraws from Partnership with 10% extra)