In: Accounting
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, 2019, 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 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, 2020, Terri Dunn becomes a third partner in this business by contributing $25,000 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 2020 is reported as $62,000. Each partner withdraws the full amount that is allowed.
On January 1, 2021, 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 2021 is $66,000 with the partners again taking their full drawing allowance.
On January 1, 2022, 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.
The total capital contribution of the firm:
Building | 62000 | |||
Equipment | 36000 | |||
Cash | 32000 | |||
130000 | ||||
Journal Entry | ||||
Building a\c Dr. | 62000 | |||
Equipment a\c Dr. | 36000 | |||
Cash a\c Dr. | 32000 | |||
To O' Donell capital | 130000 | |||
Since in the year 2019, there was a loss hence 4000 will be credited to his partnership income, as it is higher. | ||||
Profit and loss a\c Dr. | 4000 | |||
To O' Donell capital | 4000 | |||
Interest on capital (p&l) a\c Dr. | 13000 | |||
To O' Donell capital | 13000 | |||
(for interest credited to his capital a\c) | ||||
Reese capital a\c Dr. | 27000 | |||
To profit and loss a\c | 27000 | |||
(loss allocated to Reese a\c) | ||||
No amount is credited to Reese a\c as there is a loss. | ||||
In the year 2020 Dunn is admitted with 25% partnership share | ||||
Bonus method | ||||
The total capital contribution is 147000 of partnership firm | ||||
Dunn brings 25000 cash | ||||
Total capital = 147000 + 25000 = 172000 | ||||
Dunn's share = 172000*25% = 43000 | ||||
The admission of a new partner for an amount less than book value results in the following journal entry. | ||||
Hence the Journal entry would be | ||||
Cash a\c Dr. | 25000 | |||
Reese capital a\c Dr. | 18000 | |||
To Dunn's capital a\c | 43000 | |||
The whole loss is born by Reese as O' Donell is only entitled to fixed profit | ||||
In the year 2020 Dunn is admitted with 25% partnership share | ||||
Goodwill method | ||||
The total capital contribution is 147000 of partnership firm | ||||
Dunn brings 25000 cash | ||||
Implied partnership valuation = 147000/75% = 196000 | ||||
Dunn's share = 196000-147000 = 49000 | ||||
Godwill = 49000- 25000 = 24000 | ||||
Hence the Journal entry would be | ||||
Cash a\c Dr. | 25000 | |||
Goodwill a\c Dr. | 24000 | |||
To Dunn's capital a\c | 49000 | |||
For the year 2020, profit is 62000, the entries are as follows: | ||||
Interest on capital (p&l) a\c Dr. | 13000 | |||
To O' Donell capital | 13000 | |||
(for interest credited to his capital a\c) | ||||
Profit and loss a\c Dr. | 9800 | |||
To O' Donell capital | 9800 | |||
(profit for O' Donell = (62000-13000)*20% = 9800 or 4000 higher | ||||
The remaining profit i.e. (62000- 22800 = 39200) to be distributed to Reese and Dunn in the ratio of 6:4 | ||||
Profit and loss a\c Dr. | 39200 | |||
To Reese's capital a\c | 23520 | |||
To Dunn's capital a\c | 15680 | |||
(profit distribution between partners) | ||||
Dunn sells her interest to Postner and Postner pays directly to Dunn | ||||
Dunn's share | ||||
If bonus method is followed | ||||
Initial capital | 43000 | |||
+ profit for the year | 15680 | |||
- withdrawal during the year | 6000 | |||
Balance at end | 52680 | |||
She sold her share at a profit of 95000-52680 =42320 | ||||
Dunn sells her interest to Postner and Postner pays directly to Dunn | ||||
Dunn's share |
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partnership. On January 1, 2013, O’Donnell invests a building worth
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Steve Reese is a well-known interior designer in Fort Worth, Texas. He wants to start his...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, 2019, 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...
Steve Reese is a well-known interior designer in Fort Worth, Texas. He wants to start his...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
$100,000 and equipment valued at $88,000 as well as $42,000 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...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
$130,000 and equipment valued at $140,000 as well as $60,000 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...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, 2019, 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...
Steve Reese is a well-known interior designer in Fort Worth, Texas. He wants to start his...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, 2019, O’Donnell invests a building worth
$130,000 and equipment valued at $140,000 as well as $60,000 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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Texas. He wants to start his own business and convinces Rob
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$108,000 and equipment valued at $64,000 as well as $98,000 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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