Steve Reese is a wellknown interior designer in Fort Worth T

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 O’Donnell to join this partnership, Reese draws up the following profit and loss agreement:

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 $24,000 cash to the partnership. Dunn receives a 25 percent share of the business’s capital. The profit and loss agreement is altered as follows:

Partnership income for 2017 is reported as $68,000. 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 $105,000 directly to Dunn. Net income for 2018 is $69,000 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.

Solution

DATE JOURNAL DEBIT CREDIT 1.1.16 Building 76000 Equipment 48000 cash 36000 o donnell, capital 80000 reese , capital 80000 31.12.16 reese, capital 33000 The allocation plan specifies that O\'Donnell receives 20% in interest [or $16,000 based on $80,000 capital balance] plus $7,000 more [Because that amount exceeds 20% of the profits from the period]. The remaining $33,000 loss is assigned to Reese. o donnell, capital 23000 income summary 10000 1.1.17 cash 24000 o donnell, capital 4900 New investment by Dunn brings total capital to $194,000 after 2013 loss [$180,000 ? $10,000 + $24,000]. Dunn\'s 25% interest is $48,500 [$194,000 × 25%] with the extra $24,500 coming from the two original partners [allocated between them according to their profit and loss ratio reese , capital 19600 Dunn capital 48500 31.12.2017 o donnell, capital 9810 capital balance of o donnell 98100 reese , capital 6000 Dunn capital 6000 o donnell, drawings 9810 reese , drawings 6000 Dunn drawings 6000 o donnell reese dunn 31.12.2017 Income summary 68000 Interest (20% of $98,100 beginning capital balance) 19620 o donnell, capital 33220 reese , capital 20,868 20% of $68,000 income 13600 Dunn capital 13912 60:40 spilt of remaining $34,780 income 20,868 13912 Total 33220 20,868 13912 1.1.18 Dunn, capital 56412 Postner capital 56412 31.12.18 o donnell, capital 12151 capital balance (31.12.17) reese , capital 6000 Postner capital 6000 o donnell 121510 o donnell, drawing 12151 reese 42,268 reese , drawing 6000 postner 56412 Postner drawing 6000 31.12.18 Income summary 69000 o donnell reese postner o donnell, capital 38102 Interest (20% of $121510 beginning capital balance) 24302 reese , capital 18,539 Postner capital 12359 20% of $69000 income 13800 60:40 spilt of remaining $30,898 income 18,539 12359 Total 38102 18,539 12359