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

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Accounting

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$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 thebeginning capital balances. To entice O’Donnell to join thispartnership, Reese draws up the following profit and lossagreement: O’Donnell will be credited annually with interest equalto 10 percent of the beginning capital balance for the year.O’Donnell will also have added to his capital account 10 percent ofpartnership income each year (without regard for the precedinginterest figure) or $6,000, whichever is larger. All remainingincome is credited to Reese. Neither partner is allowed to withdrawfunds from the partnership during 2016. Thereafter, each can draw$6,000 annually or 15 percent of the beginning capital balance forthe year, whichever is larger. The partnership reported a net lossof $12,000 during the first year of its operation. On January 1,2017, Terri Dunn becomes a third partner in this business bycontributing $10,000 cash to the partnership. Dunn receives a 20percent share of the business’s capital. The profit and lossagreement is altered as follows: O’Donnell is still entitled to (1)interest on his beginning capital balance as well as (2) the shareof partnership income just specified. Any remaining profit or losswill be split on a 5:5 basis between Reese and Dunn, respectively.Partnership income for 2017 is reported as $66,000. Each partnerwithdraws the full amount that is allowed. On January 1, 2018, Dunnbecomes ill and sells her interest in the partnership (with theconsent of the other two partners) to Judy Postner. Postner pays$90,000 directly to Dunn. Net income for 2018 is $68,000 with thepartners again taking their full drawing allowance. On January 1,2019, Postner withdraws from the business for personal reasons. Thearticles of partnership state that any partner may leave thepartnership at any time and is entitled to receive cash in anamount equal to the recorded capital balance at that time plus 10percent. Prepare journal entries to record the precedingtransactions on the assumption that the bonus (or no revaluation)method is used. Drawings need not be recorded, although thebalances should be included in the closing entries. Prepare journalentries to record the previous transactions on the assumption thatthe goodwill (or revaluation) method is used. Drawings need not berecorded, although the balances should be included in the closingentries.

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 & Explanation Solved by verified expert
3.8 Ratings (319 Votes)
Answer No Date General Journal Debit Credit 1 Jan01 2016 Building 74000 Equipment 44000 Cash 32000 ODonnell Capital 75000 Reese Capital 75000 2 Dec31 2016 Reese Capital 25500 ODonnell Capital 13500 Income summary 12000 3 Jan01 2017 Cash 10000 ODonnell Capital 1960 Reese Capital 17640 Dunn Capital 29600 4 Dec31 2017 ODonnell Capital 12981 Reese Capital 6000 Dunn Capital 6000 ODonnell Drawing 12981 Reese Drawing 6000 Dunn Drawing 6000 5 Dec31 2017 Income summary 66000 ODonnell Capital    See Answer
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In: AccountingSteve Reese is a well-known interior designer in Fort Worth,Texas. He wants to start his...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$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 thebeginning capital balances. To entice O’Donnell to join thispartnership, Reese draws up the following profit and lossagreement: O’Donnell will be credited annually with interest equalto 10 percent of the beginning capital balance for the year.O’Donnell will also have added to his capital account 10 percent ofpartnership income each year (without regard for the precedinginterest figure) or $6,000, whichever is larger. All remainingincome is credited to Reese. Neither partner is allowed to withdrawfunds from the partnership during 2016. Thereafter, each can draw$6,000 annually or 15 percent of the beginning capital balance forthe year, whichever is larger. The partnership reported a net lossof $12,000 during the first year of its operation. On January 1,2017, Terri Dunn becomes a third partner in this business bycontributing $10,000 cash to the partnership. Dunn receives a 20percent share of the business’s capital. The profit and lossagreement is altered as follows: O’Donnell is still entitled to (1)interest on his beginning capital balance as well as (2) the shareof partnership income just specified. Any remaining profit or losswill be split on a 5:5 basis between Reese and Dunn, respectively.Partnership income for 2017 is reported as $66,000. Each partnerwithdraws the full amount that is allowed. On January 1, 2018, Dunnbecomes ill and sells her interest in the partnership (with theconsent of the other two partners) to Judy Postner. Postner pays$90,000 directly to Dunn. Net income for 2018 is $68,000 with thepartners again taking their full drawing allowance. On January 1,2019, Postner withdraws from the business for personal reasons. Thearticles of partnership state that any partner may leave thepartnership at any time and is entitled to receive cash in anamount equal to the recorded capital balance at that time plus 10percent. Prepare journal entries to record the precedingtransactions on the assumption that the bonus (or no revaluation)method is used. Drawings need not be recorded, although thebalances should be included in the closing entries. Prepare journalentries to record the previous transactions on the assumption thatthe goodwill (or revaluation) method is used. Drawings need not berecorded, although the balances should be included in the closingentries.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.

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