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.
This is the second time I post this question because the answer I received was wrong
| a) | ||
| 1) | ||
| Building | $128000 | |
| Equipment | $136000 | |
| Cash | $56000 | |
| O'Donnell, Capital | $160000 | |
| Reese, Capital | $160000 | |
| (To record initial investment. Assets recorded at fair value
with two equal capital balances.) |
||
| 2) | ||
| Reese, Capital | $50000 | |
| O'Donnell, Capital ($160,000 x 20% ) + 8000 | $40000 | |
| Income Summary | $10000 | |
| (The allocation plan specifies that O'Donnell will
receive 20% in interest [or $32,000 based on $160,000 capital balance] plus $8,000 more [since that amount is greater than 15% of the profits from the period]. The remaining $50,000 loss is assigned to Reese) |
||
| 3) | ||
| Cash | $60000 | |
| O'Donnell,Capital (15%) | $2100 | |
| Reese,Capital (85%) | $11900 | |
| Dunn, Capital | $74000 | |
| New investment by Dunn brings total capital to $370,000 after
2017 loss [$320,000 – $10,000 + $60,000]. Dunn's 20% interest is $74,000 [$370,000 × 20%] with the extra $14,000 coming from the two original partners [allocated between them according to their profit and loss ratio].) |
||
| 4) | ||
| O'Donnell,Capital | $39580 | |
| Reese,Capital | $19620 | |
| Dunn, Capital | $14800 | |
| O'Donnell,Drawing | $39580 | |
| Reese,Drawing | $19620 | |
| Dunn, Drawing | $14800 | |
| To close out drawings accounts for the year based on
distributing 20% of each partner's beginning capital balances [after adjustment for Dunn's investment] or $7,000 whichever is greater. O'Donnell's capital is $197,900 [$160,000 + $40,000 – $2100]), Reese Capital $98100 ($160000 -50000 -11900); Dunn Capital $74000 |
Steve Reese is a well-known interior designer in Fort Worth, Texas. He wants to start his own bus...
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 $62,000 and equipment valued at $36,000 as well as $32,000 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...
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 $124,000 and equipment valued at $128,000 as well as $48,000 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...
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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...
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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 $102,000 and equipment valued at $92,000 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...
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...
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 $126,000 and equipment valued at $132,000 as well as $52,000 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...
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 $76,000 and equipment valued at $48,000 as well as $36,000 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...
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...