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, 2016, O'Donnell invests a building worth $72,000 and equipment valued at $40,000 as well as $28,000 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 agreement: O'Donnell will be credited annually with interest equal to 20 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 $5,000, 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 20 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, 2017, Terri Dunn becomes a third partner in this business by contributing $25,000 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 5:5 basis between Reese and Dunn, respectively. Partnership income for 2017 is reported as $64,000. 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 $75,000 directly to Dunn. Net income for 2018 is $67,000 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. 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. b. 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. 01/01/2016 72,000 0 Building Equipment Cash O'Donnell, capital Reese, capital 40,000 ) 28,0000 12/31/2016 Reese, capital O'Donnell, capital Income summary 11,000 0 _01/01/2017 Cash O'Donnell, capital Reese, capital Dunn, capital 25,000/ 12/31/2017 O'Donnell, capital Reese, capital Dunn, capital O'Donnell, drawings Reese, drawings Dunn, drawings 12/31/2017 64,000 Income summary O'Donnell, capital Reese, capital Dunn, capital 01/01/2018 Dunn, capital Postner, capital 12/31/2018 O'Donnell, capital Reese, capital Postner, capital O'Donnell, drawings Reese, drawings Postner, drawings 12/31/2018 67,000 Income summary O'Donnell, capital Reese, capital Postner, capital 01/01/2019 Postner, capital O'Donnell, capital Reese, capital Cash Required A Required B > _01/01/2016 Building Equipment Cash Goodwill O'Donnell, capital Reese, capital 72,0000 40,0000 28,000/ 140,000/ 140 , 000 140 , 000 12/31/2016 44,0000 Reese, capital O'Donnell, capital Income summary 33,0000 11,000/ _ 3 1 _01/01/2017 Cash Goodwill Dunn, capital _1 12 / 31 / 2017 19,200/ O'Donnell, capital Reese, capital Dunn, capital O'Donnell, drawings Reese, drawings Dunn, drawings 19 , 200 12/31/2017 64,000 Income summary O'Donnell, capital Reese, capital Dunn, capital 01/01/2018 Goodwill O'Donnell, capital Reese, capital Dunn, capital OOO OOO OO 0000 0000 01/01/2018 Dunn, capital Postner, capital 12/31/2018 O'Donnell, capital Reese, capital Postner, capital O'Donnell, drawings Reese, drawings Postner, drawings 12/31/2018 67,000 Income summary O'Donnell, capital Reese, capital Postner, capital OOO OOO 10 01/01/2019 Goodwill O'Donnell, capital Reese, capital Postner, capital 11 01/01/2019 Postner, capital Cash