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, 2013, O’Donnell invests a building worth $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 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 10 percent of partnership income each year (without regard for the preceding interest figure) or $8,000, whichever is larger. All remaining income is credited to Reese. • Neither partner is allowed to withdraw funds from the partnership during 2013. Thereafter, each can draw $9,000 annually or 15 percent of the beginning capital balance for the year, whichever is larger. The partnership reported a net loss of $8,000 during the first year of its operation. On January 1, 2014, Terri Dunn becomes a third partner in this business by contributing $21,000 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 2014 is reported as $82,000. Each partner withdraws the full amount that is allowed. On January 1, 2015, Dunn becomes ill and sells her interest in the partnership (with the consent of the other two partners) to Judy Postner. Postner pays $150,000 directly to Dunn. Net income for 2015 is $80,000 with the partners again taking their full drawing allowance. On January 1, 2016, 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your answers to the nearest dollar amount.)

Answer 1

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In the Books of Partnership firm

S No .	Date	General Journal		Dr. $	Cr. $
1	01/01/2013	Building Equipment Cash O'Donnell, Capital Reese, Capital (To record initial investment. Assets recorded at fair value with two equal capital balances.)	Dr. Dr. Dr. Cr. Cr.	108000 64000 98000	135000 135000
2	12/31/2013	Reese, Capital O'Donnell, Capital ($135,000 x 10% ) + 8000 Income Summary (The allocation plan specifies that O'Donnell will receive 10% in interest [or $13500 based on $135,000 capital balance] plus $8,000 more [since that amount is greater than 15% of the profits from the period]. The remaining $29,500 loss is assigned to Reese)	Dr. Cr. Cr.	29500	21500 8000
3	01/01/2014	Cash O'Donnell,Capital (10%*35600) Reese,Capital (90%*35600) Dunn, Capital New investment by Dunn brings total capital to $ 283,000 after 2013 loss   [$ 270,000 – $ 8,000 + $ 21,000]. Dunn's 20% interest is $ 56,600 [$283,000 × 20%] with the extra $35,600 coming from the two original partners [allocated between them according to their profit and loss ratio].)	Dr. Dr. Dr. Cr.	21000 3560 32040	56600
4	12/31/2014	O'Donnell,Capital ($152,940 * 0.15 OR 9000 w.e.higher) Reese,Capital ($73460 * 0.15 OR 9000 w.e.higher) Dunn, Capital ($73460 * 0.15 OR 9000 w.e.higher) O'Donnell,Drawing Reese,Drawing Dunn, Drawing To close out drawings accounts for the year based on distributing 15% of each partner's beginning capital balances [after adjustment for Dunn's investment] or $ 9,000 whichever is greater. O'Donnell's capital is $152,940 [$135,000 + $21,500 – $3560]), Reese Capital $73460 ($135000 -29500 - 32040); Dunn Capital $56600	Dr. Dr. Dr. Cr. Cr. Cr.	22941 11019 9000	22941 11019 9000
5	12/31/2014	Income Summary O'Donnell,Capital [ 82000*10% + Interest 152940* 10% ] Reese,Capital [ (82000 – 8200 – 15294 ) /2 ] Dunn, Capital [ (82000 – 8200 – 15294 ) /2 ]	Dr. Cr. Cr. Cr.	82000	23494 29253 29253
6	01/01/2015	Dunn, Capital Postner ,Capital ( Initail Capital 56600 – 9000 drawings + profit share 29253 )	Dr. Cr.	76853	76853
7		No entry for - Postner pays $150,000 directly to Dunn.	Dr. Cr.
8	12/31/2015	O'Donnell,Capital ($153493 * 0.15 OR 9000 w.e.higher) Reese,Capital ($91694 * 0.15 OR 9000 w.e.higher) Postner ,Capital ($76853 * 0.15 OR 9000 w.e.higher) O'Donnell,Drawing Reese,Drawing Postner , Drawing (Note 1)	Dr. Dr. Dr. Cr. Cr. Cr.	23024 13754 11528	23024 13754 11528
9	12/31/2015	Income Summary O'Donnell,Capital [ 80000*10% + Interest 153493* 10% ] Reese,Capital [ (80000 – 8000 – 15349 ) /2 ] Postner, Capital [ (80000 – 8200 – 15349 ) /2 ]	Dr. Cr. Cr. Cr.	80000	23349 28326 28325
10	01/01/2016	Postner ,Capital Cash (76853 – 11528 + 28325 )	Dr. Cr.	93650	93650

Note 1 :

Capital Balance as on December 31 , 2014

	O'Donnell	Reese	Dunn
Initial Investment in 2013	135000	135000
2013 profit allocation	21500	(29500)
Dunn’s Investment	(3560)	(32040)	56600
2014 Drawings	(22941)	(11019)	(9000)
2014 Profit Allocation	23494	29253	29253
Closing Balance on 12/31/2014	153493	91694	76853