Steve Reese is a well-known interior designer in Fort Worth, Texas. He wants to

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 $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.

Explanation / Answer

$24,000 + Goodwill =

$24,000 + Goodwill =

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. Date General Journal Debit Credit 01.01.2016 Building $76,000 Equipment 48000 Cash 36000 To O'Donnell Capital 80000 To Steve Reese's capital 80000 31.12.2016 Steve Reese's capital 42000 To O'Donnell capital 32000 To Income Summary 10000 (The allocation plan specifies that O'Donnell receives 20% in interest [or $16,000 based on $80,000 capital balance] plus $16000 more. The remaining $42,000 loss is assigned to Steve Reese.) 01.01.2017 Cash 24000 O'Donnell Capital 3900 Steve Reese's capital 15600 To Terri Dunn capital 43500 The total capital would be (160000-10000+24000) $174000 of which Terri's share is 25% of 174000 $43500 O'Donnell Capital share - 20% of (43500-24000) 3900 Steve Reese's capital share - 80% (43500-24000) 15600 31.12.2017 O'Donnell Capital 10810 Steve Reese's capital 6000 Terri Dunn capital 6000 To O'Donnell, drawings 10810 To Steve Reese's drawings 6000 To Terri Dunn's drawings 6000 (To close out drawings account for the year based on distributing 10% of each partner's beginning capital balances or $6000 whichiver is greater O'Donnell Capital(80000+32000-3900) 10810 Steve Reese's capital(80000-42000-15600) 2240 6000 6000 Terri Dunn capital 4350 6000 6000 31.12.2017 Income Summary 68000 To O'Donnell Capital 35220 To Steve Reese's capital 19668 To Terri Dunn capital 13112 (80000+32000-3900)*20%- O'Donnell 21620 68000*20% 13600 32780 01.01.2018 Terri Dunn capital 50612 To Postner capital 50612 (43500-6000+13112) 31.12.2018 O'Donnell Capital 13251 Steve Reese's capital 6000 Postner's capital 6000 To O'Donnell, drawings 13251 To Steve Reese's drawings 6000 To Postner's drawings 6000 O'Donnell Capital(80000+32000-3900-10810+35220) 13251 Steve Reese's capital(80000-42000-15600-6000+19668) 3606.8 6000 6000 Postner's capital 5061.2 6000 31.12.2018 Income Summary 69000 To O'Donnell Capital 40302 To Steve Reese's capital 17218.8 To Postner's capital 11479.2 O' Donnel share 13800 Capital ((80000+32000-3900-10810+35220) 26502 40302 01.01.2019 O'Donnell Capital(6209.12)*20%                                              1,241.82 Steve Reese's capital (6209.12)*80%                                              4,967.30 Postner's capital(50612+11479.20)                                            62,091.20 6209.12 To Cash 68300.32 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 Date General Journal Debit Credit 01.01.2016 Building $76,000 Equipment 48000 Cash 36000 Goodwill 160000 To O'Donnell Capital 160000 To Steve Reese's capital 160000 31.12.2016 Steve Reese's capital 74000 To O'Donnell capital 64000 To Income Summary 10000 (The allocation plan specifies that O'Donnell receives 20% in interest [or $32,000 based on $160,000 capital balance] plus $32000 more. The remaining $74,000 loss is assigned to Steve Reese.) 01.01.2017 Cash 24000 Goodwill 47333.33 To Terri Dunn capital 71333.33 Goodwill will have to be calculated $24,000 + Goodwill = 25% (Current Capital + $24,000 + Goodwill)

$24,000 + Goodwill =

25% ($310,000 + $24,000 + Goodwill)

$24,000 + Goodwill =

$77500 + 0.25 Goodwill 77500 0.75 Goodwill = 53500 24000 Goodwill = 71333.33 53500 71333.33 31.12.2017 O'Donnell Capital(160000+64000) 22400 Steve Reese's capital(160000-74000) 8600 Terri Dunn capital 7133.333 To O'Donnell, drawings 22400 To Steve Reese's drawings 8600 To Terri Dunn's drawings 7133.33 31.12.2017 Income Summary 68000 To O'Donnell Capital 58400 To Steve Reese's capital 5760 To Terri Dunn capital 3840 (160000+64000)*20%- O'Donnell 44800 68000*20% 13600 58400 01.01.2018 Goodwill (105000-71333.33-7133.33+3840) 30373.34 To O'Donnell Capital      6,074.67 To Steve Reese's capital    14,579.20 To Terri Dunn capital      9,719.47 01.01.2018 Terri Dunn capital 105000 To Postner capital 105000 31.12.2018 O'Donnell Capital 26607.47 Steve Reese's capital 9773.92 Postner's capital 10500 To O'Donnell, drawings 26607.47 To Steve Reese's drawings 9773.92 To Postner's drawings 10500 O'Donnell Capital(160000+64000-22400+58400+6074.67) 26607.467 Steve Reese's capital(160000-74000+14579.20+5760-8600) 9773.92 Postner's capital(105000)*10% 10500 31.12.2018 Income Summary 69000 To O'Donnell Capital    67,014.93 To Steve Reese's capital      1,191.04 To Postner's capital          794.03 O' Donnel share 13800 Capital (160000+64000-22400+58400+6074.67) 53214.934 67014.934 01.01.2019 Goodwill 23823.5 To O'Donnell Capital 4764.7 To Steve Reese's capital 11435.28 To Postner's capital 7623.52 Postner will be paid(105000-10500+794.03)                                            95,294.03                                              9,529.40 Total                                          104,823.43 Postner is being paid 9529.40 in excess of his share of 9529.40/0.40 23823.5 01.01.2019 Postner's capital 104823.433 To Cash 104823.43

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