Steve Reese is a well-known interior designer in Fort Worth,Texas. He wants to start his own business and convinces RobO’Donnell, a local merchant, to contribute the capital to form apartnership. On January 1, 2016, O’Donnell invests a building worth$124,000 and equipment valued at $128,000 as well as $48,000 incash. Although Reese makes no tangible contribution to thepartnership, he will operate the business and be an equal partnerin the beginning capital balances.

To entice O’Donnell to join this partnership, Reese draws up thefollowing profit and loss agreement:

• O’Donnell will be credited annually with interest equal to 20percent of the beginning capital balance for the year.
• O’Donnell will also have added to his capital account 10percent of partnership income each year (without regard for thepreceding interest figure) or $6,000, whichever is larger. Allremaining income is credited to Reese.
• Neither partner is allowed to withdraw funds from thepartnership during 2016. Thereafter, each can draw $7,000 annuallyor 15 percent of the beginning capital balance for the year,whichever is larger.

The partnership reported a net loss of $11,000 during the firstyear of its operation. On January 1, 2017, Terri Dunn becomes athird partner in this business by contributing $19,000 cash to thepartnership. Dunn receives a 20 percent share of the business’scapital. The profit and loss agreement is altered as follows:

• O’Donnell is still entitled to (1) interest on his beginningcapital balance as well as (2) the share of partnership income justspecified.
• Any remaining profit or loss will be split on a 5:5 basisbetween Reese and Dunn, respectively.

Partnership income for 2017 is reported as $94,000. Each partnerwithdraws the full amount that is allowed.

On January 1, 2018, Dunn becomes ill and sells her interest inthe partnership (with the consent of the other two partners) toJudy Postner. Postner pays $145,000 directly to Dunn. Net incomefor 2018 is $94,000 with the partners again taking their fulldrawing allowance.

On January 1, 2019, Postner withdraws from the business forpersonal reasons. The articles of partnership state that anypartner may leave the partnership at any time and is entitled toreceive cash in an amount equal to the recorded capital balance atthat time plus 10 percent.

1. Prepare journal entries to record the preceding transactions onthe assumption that the bonus (or no revaluation) method is used.Drawings need not be recorded, although the balances should beincluded in the closing entries.

2. Prepare journal entries to record the previous transactions onthe assumption that the goodwill (or revaluation) method is used.Drawings need not be recorded, although the balances should beincluded in the closing entries.