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 $106,000 and equipment valued at $48,000 as well as $46,000 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 15 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 2016. Thereafter, each can draw $8,000 annually or 20 percent of the beginning capital balance for the year, whichever is larger.

The partnership reported a net loss of $9,000 during the first year of its operation. On January 1, 2017, Terri Dunn becomes a third partner in this business by contributing $30,000 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 2017 is reported as $76,000. 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 $95,000 directly to Dunn. Net income for 2018 is $73,000 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.

VUIIVIUI VVUITIU 1 106,000 48,000 46,000 01/01/2016 Building Equipment Cash Goodwill O'Donnell, capital Reese, capital - 2 12/31/2016 Reese, capital O'Donnell, capital Income summary - 3 30,000 01/01/2017 Cash Goodwill Dunn, capital - 4 12/31/2017 O'Donnell, capital Reese, capital Dunn, capital O'Donnell, drawings Reese, drawings Dunn, drawings HIILIPURIFTTTTTTTTTTTA TALITAT 5 76,000 12/31/2017 Income summary O'Donnell, capital Reese, capital Dunn, capital 6 01/01/2018 Goodwill O'Donnell, capital Reese, capital Dunn, capital 7 01/01/2018 Dunn, capital Postner, capital 8 12/31/2018 O'Donnell, capital Reese, capital Postner, capital O'Donnell, drawings Reese, drawings Postner, drawings 9 12/31/2018 Income summary O'Donnell, capital Reese, capital Postner, capital 10 01/01/2019 Goodwill O'Donnell, capital Reese, capital Postner, capital 11 01/01/2019 Postner, capital Cash VUIIVIUI VVUITIU 1 106,000 48,000 46,000 01/01/2016 Building Equipment Cash Goodwill O'Donnell, capital Reese, capital - 2 12/31/2016 Reese, capital O'Donnell, capital Income summary - 3 30,000 01/01/2017 Cash Goodwill Dunn, capital - 4 12/31/2017 O'Donnell, capital Reese, capital Dunn, capital O'Donnell, drawings Reese, drawings Dunn, drawings HIILIPURIFTTTTTTTTTTTA TALITAT 5 76,000 12/31/2017 Income summary O'Donnell, capital Reese, capital Dunn, capital 6 01/01/2018 Goodwill O'Donnell, capital Reese, capital Dunn, capital 7 01/01/2018 Dunn, capital Postner, capital 8 12/31/2018 O'Donnell, capital Reese, capital Postner, capital O'Donnell, drawings Reese, drawings Postner, drawings 9 12/31/2018 Income summary O'Donnell, capital Reese, capital Postner, capital 10 01/01/2019 Goodwill O'Donnell, capital Reese, capital Postner, capital 11 01/01/2019 Postner, capital Cash