Steve Reese is a well-known interior designer in Fort Worth, Texas. He wants to start his own… 1 answer below »
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 $100,000 and equipment valued
at $88,000 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
• 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 15 percent of partnership income each year
(without regard for the preceding interest figure) or $4,000, 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 $9,000 annually or 20 percent of the beginning capital balance for the year, whichever is
The partnership reported a net loss of $12,000 during the first year of its operation. On January 1,
2014, Terri Dunn becomes a third partner in this business by contributing $32,000 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 $74,000. Each partner withdraws the full amount that is
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 $120,000 directly to Dunn. Net income for 2015
is $76,000 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 anytime and is entitled to receive cash
in an amount equal to the recorded capital balance at that time plus 10 percent
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. (If no entry is required for a transactionlevent, select “No journal
entry required” in the first account field. Round your answers to the nearest dollar amount)