Steve Reese is a well-known interior designer in Fort Worth, Texas. He wants to start his own business and convinces Rob ODonnell, a local merchant, to contribute the capital to form a partnership. On January 1, 2019, ODonnell invests a building worth $124,000 and equipment valued at $128,000 as well as $48,000 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 ODonnell to join this partnership, Reese draws up the following profit and loss agreement:

• ODonnell will be credited annually with interest equal to 20 percent of the beginning capital balance for the year.
• ODonnell will also have added to his capital account 10 percent of partnership income each year (without regard for the preceding interest figure) or $6,000, whichever is larger. All remaining income is credited to Reese.
• Neither partner is allowed to withdraw funds from the partnership during 2019. Thereafter, each can draw $7,000 annually or 15 percent of the beginning capital balance for the year, whichever is larger.

The partnership reported a net loss of $11,000 during the first year of its operation. On January 1, 2020, Terri Dunn becomes a third partner in this business by contributing $19,000 cash to the partnership. Dunn receives a 20 percent share of the businesss capital. The profit and loss agreement is altered as follows:

• ODonnell 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 5:5 basis between Reese and Dunn, respectively.

Partnership income for 2020 is reported as $94,000. Each partner withdraws the full amount that is allowed.

On January 1, 2021, Dunn becomes ill and sells her interest in the partnership (with the consent of the other two partners) to Judy Postner. Postner pays $145,000 directly to Dunn. Net income for 2021 is $94,000 with the partners again taking their full drawing allowance.

On January 1, 2022, 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.

1. 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.

2. 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.

1 9 ---- Record the cash paid to the withdrawing partner. Note: Enter debits before credits.

01/01/2022 Postner, capital O'Donnell, capital Reese, capital Cash

2

1	01/01/2019	Building	124,000
		Equipment	128,000
		Cash	48,000
		Goodwill	300,000
		O'Donnell, capital		300,000
		Reese, capital		300,000
2	12/31/2019	Reese, capital	77,000
		O'Donnell, capital		66,000
		Income summary		11,000
3	01/01/2020	Cash	19,000
		Goodwill
		Dunn, capital
4	12/31/2020	O'Donnell, capital	54,900
		Reese, capital	33,450
		Dunn, capital
		O'Donnell, drawings		54,900
		Reese, drawings		33,450
		Dunn, drawings
5	12/31/2020	Income summary	94,000
		O'Donnell, capital		82,600
		Reese, capital		5,700
		Dunn, capital		5,700
6	01/01/2021	Goodwill
		O'Donnell, capital
		Reese, capital
		Dunn, capital
7	01/01/2021	Dunn, capital	145,000
		Postner, capital		145,000
8	12/31/2021	O'Donnell, capital
		Reese, capital
		Postner, capital	21,750
		O'Donnell, drawings
		Reese, drawings
		Postner, drawings		21,750
9	12/31/2021	Income summary	94,000
		O'Donnell, capital
		Reese, capital
		Postner, capital
10	01/01/2022	Goodwill
		O'Donnell, capital
		Reese, capital
		Postner, capital
11	01/01/2022	Postner, capital
		Cash

for empty entries, Thank you a lot