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 $74,000 and equipment valued at $44,000 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: 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 $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 $6,000 annually or 15 percent of the beginning capital balance for the year, whichever is larger. The partnership reported a net loss of $12,000 during the first year of its operation. On January 1, 2017, Terri Dunn becomes a third partner in this business by contributing $10,000 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 $66,000. 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 $90,000 directly to Dunn. Net income for 2018 is $68,000 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.

Part1)

1 Record the initial investment of assets by partners.

2 Record the distribution of net income to partners.

3 Record the admittance of Dunn into the partnership.

4 Record entry to close drawings accounts.

5 Record the distribution of net income to partners.

6 Record the admittance of Postner into the partnership.

7 Record entry to close drawings accounts.

8 Record the distribution of net income to partners.

9 Record the cash paid to the withdrawing partner.

Answer 1

Answer:

No.	Date	General Journal	Debit	Credit
1	Jan.01, 2016	Building	$     74,000
		Equipment	44,000
		Cash	32,000
		O'Donnell, Capital		$   75,000
		Reese, Capital		75,000
2	Dec.31, 2016	Reese, Capital	$     25,500
		O'Donnell, Capital		$   13,500
		Income summary		12,000
3	Jan.01, 2017	Cash	$     10,000
		O'Donnell, Capital	1,960
		Reese, Capital	17,640
		Dunn, Capital		$   29,600
4	Dec.31, 2017	O'Donnell, Capital	$     12,981
		Reese, Capital	6,000
		Dunn, Capital	6,000
		O'Donnell, Drawing		$   12,981
		Reese, Drawing		6,000
		Dunn, Drawing		6,000
5	Dec.31, 2017	Income summary	$     66,000
		O'Donnell, Capital		$   23,908
		Reese, Capital		21,046
		Dunn, Capital		21,046
6	Jan.01, 2018	Dunn, Capital	$     44,646
		Poster, Capital		$   44,646
7	Dec.31, 2018	O'Donnell, Capital	$     14,620
		Reese, Capital	7,036
		Poster, Capital	6,697
		O'Donnell, Drawing		$   14,620
		Reese, Drawing		7,036
		Poster, Drawing		6,697
8	Dec.31, 2018	Income summary	$     68,000
		O'Donnell, Capital		$   26,293
		Reese, Capital		20,854
		Poster, Capital		20,853
9	Jan.01, 2019	Poster, Capital	$     58,802
		O'Donnell, Capital	588
		Reese, Capital	5,292
		Cash		$   64,682

Explanation:

2. The allocation plan specifies that O'Donnell receives 10% in interest [or $7,500 based on $75,000 capital balance] plus $6,000 more [Because that amount exceeds 10% of the profits from the period]. The remaining $25,500 loss is assigned to Reese.

3.

O'Donnell, Capital (10%) = $1,960

Reese, Capital (90%) = $17,640

(New investment by Dunn brings total capital to $148,000 after 2017 loss [$150,000 − $12,000 + $10,000]. Dunn's 20% interest is $29,600 [$148,000 × 20%] with the extra $19,600 coming from the two original partners [allocated between them according to their profit and loss ratio].

4. 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 $6,000 whichever is greater. O'Donnell's capital is $86,540 [$75,000 + $13,500 − $1,960]

5.

2017 income distribution
	O'Donnell	Reese	Dunn
Interest (20% of 86,540)	17308
10% of 66,000	6600
50:50 split of 42,092		21046	21046
	23908	21046	21046

6.

	O'Donnell	Reese	Dunn
2016 initial investment	75000	75000
2016 profit allocation	13500	-25500
Dunn's investment	-1960	-17640	29600
2017 drawing	-12981	-6000	-6000
2017 profit allocation	23908	21046	21046
Dec 31, 2017 Capital balance	97467	46906	44646

7.

Dec 31, 2017 Capital balance	97467	46906	44646
Drawing for 2018 @15% of above	14620	7036	6697

8.

2018 income distribution
	O'Donnell	Reese	Poster
Interest (20% of 97467)	19493
10% of 68,000	6800
50:50 split of 41,707		20854	20853
	26293	20854	20853

9.

O'Donnell, Capital (10%) = $588

Reese, Capital (90%) = $5,292

(Postner's capital is $58,802 [$44,646 − $6,697 + $20,853]. Extra 10% payment is deducted from the two remaining partners' capital accounts.)