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, 2016, ODonnell invests a building worth $76,000 and equipment valued at $48,000 as well as $36,000 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 20 percent of partnership income each year (without regard for the preceding interest figure) or $7,000, whichever is larger. All remaining income is credited to Reese.

Neither partner is allowed to withdraw funds from the partnership during 2016. Thereafter, each can draw $6,000 annually or 10 percent of the beginning capital balance for the year, whichever is larger.

The partnership reported a net loss of $10,000 during the first year of its operation. On January 1, 2017, Terri Dunn becomes a third partner in this business by contributing $24,000 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 2017 is reported as $68,000. Each partner withdraws the full amount that is allowed.

On January 1, 2018, Dunn becomes ill and sells her interest in the partnership (with the consent of the other two partners) to Judy Postner. Postner pays $105,000 directly to Dunn. Net income for 2018 is $69,000 with the partners again taking their full drawing allowance.

On January 1, 2019, 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. Record the initial investment of assets by partners.

Date	General Journal		Debit	Credit
01/01/2016		Building					76,000
		Equipment					48,000
		Cash					36,000
		O'Donnell, capital

2.Record the distribution of net income to partners.

Note: Enter debits before credits.

Date

General Journal

Debit

Credit

12/31/2016	Reese, capital
	O'Donnell, capital
	Income summary		10,000

3. Record the admittance of Dunn into the partnership.

Note: Enter debits before credits.

Date

General Journal

Debit

Credit

01/01/2017	Cash	24,000
	Reese, capital
	O'Donnell, capital

4. Record entry to close drawings accounts.

ote: Enter debits before credits.

Date

General Journal

Debit

Credit

12/31/2017	O'Donnell, capital
	Reese, capital	6,000
	Dunn, capital
	O'Donnell, drawings
	Reese, drawings
	Dunn, drawings

Record the distribution of net income to partners.

Note: Enter debits before credits.

Date

General Journal

Debit

Credit

12/31/2017		68,000
	O'Donnell, capital
	Reese, capital
	Dunn, capital

6. Record the admittance of Postner into the partnership.

Note: Enter debits before credits.

Date

General Journal

Debit

Credit

01/01/2018	Dunn, capital
	Postner, capital

7. Record entry to close drawings accounts.

Note: Enter debits before credits.

Date

General Journal

Debit

Credit

12/31/2018	O'Donnell, capital
	Reese, capital
	Postner, capital
	O'Donnell, drawings
	Reese, drawings
	Postner, drawings