Steve Reese is a well-known interior designer in Fort Worth, Texas. He wants to
ID: 2498815 • Letter: S
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 $60,000 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 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 $7,000, 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 $8,000 annually or 15 percent of the beginning capital balance for the year, whichever is larger.
The partnership reported a net loss of $10,000 during the first year of its operation. On January 1, 2014, Terri Dunn becomes a third partner in this business by contributing $15,000 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 6:4 basis between Reese and Dunn, respectively.
Partnership income for 2014 is reported as $75,000. 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 $115,000 directly to Dunn. Net income for 2015 is $74,000 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.
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.)
To entice O’Donnell to join this partnership, Reese draws up the following profit and loss
agreement:
Explanation / Answer
January 1 2013
Building Dr 108,000
Equipment Dr 60,000
cash Dr 42,000
Rob o' Donnell's capital Cr 210,000
31-12-2013
Interest on capital Dr 21000
Rob o' Donnell's capital Cr 21,000 ( 210,000 X 10%)
31-12-2013
Income Statment Dr 7,000
Rob o' Donnell's capital Cr 7,000
31-12-2013
Reese Capital Dr 17,000
Income statement Cr 17,000
01-01-2014
Cash Dr 15,000
Terri Dunn Capital Cr 15,000
31-12-2014
Interest on Capita Dr 23,800 ( (210,000+21,000+7,000) X 10%)
Rob o' Donnell's capital Cr 23,800
31-12-2014
Income statement Dr 75,000
Rob o' Donnell's capital Cr 7,500
Reese Capital Cr 40,500 ( (75,000 - 7,500) X 6/10)
Teri Dunn capital Cr 27,000 (( 75,000- 7,500) X 4/10)
31-12-2014
Rob o' Donnell's capital Dr 35,700 (238,000 X 15% or 8,000)
Reese capital Dr 8,000
Terri Dunn Capital Dr 8,000
Capital Withdrawl Cr 51,700
01-01-2015
Teri Dunn Dr 34,000
Judy Postner capital Dr 34,000
31-03-2015
Interest on Capital Dr 23,360 ( 233600 X 10%)
Rob o' Donnell's capital Cr 23,360
31-12-2015
Income statement Dr $74,000
Rob o' Donnell's capital Cr 7,400 (74,000 X 10%)
Reese capital Cr 39,960 ((74000-7400) X 6/10)
Judy Postner capital Cr 26,640
31-12-2015
Rob o' Donnell's capital Dr 35,040
Reese Capital Dr 8,000
Judy Postner capital Dr 8,000
Capital Withdrwal Cr 51,040
1-1-2016
Judy Postner Capital Dr 52,640 ( 34,000+ 26,640 - 8,000)
income statement Dr 5,264 ( 52640 X 10%)
Cash Cr 57,904
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