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 $104,000 and equipment valued at $96,000 as well as $50,000 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 10 percent of the beginning capital balance for the year.
• ODonnell will also have added to his capital account 20 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 $9,000 annually or 10 percent of the beginning capital balance for the year, whichever is larger.

The partnership reported a net loss of $6,000 during the first year of its operation. On January 1, 2020, Terri Dunn becomes a third partner in this business by contributing $40,000 cash to the partnership. Dunn receives a 25 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 6:4 basis between Reese and Dunn, respectively.

Partnership income for 2020 is reported as $78,000. 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 $175,000 directly to Dunn. Net income for 2021 is $78,000 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.

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.

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.

General Journal	Debit	Credit
1	01/01/2019	Buildingselected answer correct	104,000selected answer correct	not attempted
		Equipmentselected answer correct	96,000selected answer correct	not attempted
		Cashselected answer correct	50,000selected answer correct	not attempted
		Goodwillselected answer correct	250,000selected answer correct	not attempted
		O'Donnell, capitalselected answer correct	not attempted	250,000selected answer correct
		Reese, capitalselected answer correct	not attempted	250,000selected answer correct
2	12/31/2019	Reese, capitalselected answer correct	37,000selected answer correct	not attempted
		O'Donnell, capitalselected answer correct	not attempted	31,000selected answer correct
		Income summaryselected answer correct	not attempted	6,000selected answer correct
3	01/01/2020	Cashselected answer correct	40,000selected answer correct	not attempted
		Goodwillselected answer correct	84,667selected answer incorrect	not attempted
		Dunn, capitalselected answer correct	not attempted	124,667selected answer incorrect
4	12/31/2020	O'Donnell, capitalselected answer correct	28,100selected answer correct	not attempted
		Reese, capitalselected answer correct	21,300selected answer correct	not attempted
		Dunn, capitalselected answer correct	12,467selected answer incorrect	not attempted
		O'Donnell, drawingsselected answer correct	not attempted	28,100selected answer correct
		Reese, drawingsselected answer correct	not attempted	21,300selected answer correct
		Dunn, drawingsselected answer correct	not attempted	12,467selected answer incorrect
5	12/31/2020	Income summaryselected answer correct	78,000selected answer correct	not attempted
		O'Donnell, capitalselected answer correct	not attempted	43,700selected answer correct
		Reese, capitalselected answer correct	not attempted	20,580selected answer correct
		Dunn, capitalselected answer correct	not attempted	13,720selected answer correct
6	01/01/2021	Goodwillselected answer correct	153,375selected answer incorrect	not attempted
		O'Donnell, capitalselected answer correct	not attempted	30,675selected answer incorrect
		Reese, capitalselected answer correct	not attempted	73,620selected answer incorrect
		Dunn, capitalselected answer correct	not attempted	49,080selected answer incorrect
7	01/01/2021	Dunn, capitalselected answer correct	175,000selected answer correct	not attempted
		Postner, capitalselected answer correct	not attempted	175,000selected answer correct
8	12/31/2021	O'Donnell, capitalselected answer correct	32,728selected answer incorrect	not attempted
		Reese, capitalselected answer correct	28,950selected answer incorrect	not attempted
		Postner, capitalselected answer correct	17,500selected answer correct	not attempted
		O'Donnell, drawingsselected answer correct	not attempted	32,728selected answer incorrect
		Reese, drawingsselected answer correct	not attempted	28,590selected answer incorrect
		Postner, drawingsselected answer correct	not attempted	17,500selected answer correct
9	12/31/2021	Income summaryselected answer correct	78,000selected answer correct	not attempted
		O'Donnell, capitalselected answer correct	not attempted	48,328selected answer incorrect
		Reese, capitalselected answer correct	not attempted	17,803selected answer incorrect
		Postner, capitalselected answer correct	not attempted	11,869selected answer incorrect
10	01/01/2022	Goodwillselected answer correct	52,928selected answer incorrect	not attempted
		O'Donnell, capitalselected answer correct	not attempted	10,586selected answer incorrect
		Reese, capitalselected answer correct	not attempted	25,405selected answer incorrect
		Postner, capitalselected answer correct	not attempted	16,937selected answer incorrect
11	01/01/2022	Postner, capitalselected answer correct	186,306selected answer incorrect	not attempted
		Cashselected answer correct	not attempted	186,306selected answer incorrect

• Required A