Steve Reese is a well-known interior designer in Fort Worth, Texas. He wants to start his own business and convinces Rob O'Donnell, local merchant, to contribute the capital to form a partnership. On January 1, 2016, O'Donnell invests a building worth $130,000 and equipment valued at $140,000 as well as $60,000 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 10 percent of the beginning capital balance for the year. • O'Donnell will also have added to his capital account 10 percent of partnership income each year (without regard for the preceding interest figure) or $4,000, 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 $7,000 annually or 15 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, 2017, Terri Dunn becomes a third partner in this business by contributing $26,000 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 6:4 basis between Reese and Dunn, respectively. Partnership income for 2017 is reported as $100,000. 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 $175,000 directly to Dunn. Net income for 2018 is $99,000 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 percent.
Steve Reese is a well-known interior designer in Fort Worth, Texas. He wants to start his own business and convinces Rob O'Donnell, local merchant, to contribute the capital to form a partnership. On January 1, 2016, O'Donnell invests a building worth $130,000 and equipment valued at $140,000 as well as $60,000 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 10 percent of the beginning capital balance for the year. • O'Donnell will also have added to his capital account 10 percent of partnership income each year (without regard for the preceding interest figure) or $4,000, 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 $7,000 annually or 15 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, 2017, Terri Dunn becomes a third partner in this business by contributing $26,000 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 6:4 basis between Reese and Dunn, respectively. Partnership income for 2017 is reported as $100,000. 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 $175,000 directly to Dunn. Net income for 2018 is $99,000 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 percent.
Chapter11: Investor Losses
Section: Chapter Questions
Problem 2RP
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Using the
![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 $130,000 and
equipment valued at $140,000 as well as $60,000 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 10 percent of the beginning capital balance for the year.
• O'Donnell will also have added to his capital account 10 percent of partnership income each year (without regard for the preceding
interest figure) or $4,000, 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 $7,000 annually or 15
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, 2017, Terri Dunn becomes a third
partner in this business by contributing $26,000 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 6:4 basis between Reese and Dunn, respectively.
Partnership income for 2017 is reported as $100,000. 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 $175,000 directly to Dunn. Net income for 2018 is $99,000 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.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F33c7ad53-080e-4782-a7bc-5a50f00f94b6%2Fe606f2ed-dc0a-4ca5-b0e0-71a7f7c2b95e%2F37wurn_processed.png&w=3840&q=75)
Transcribed Image Text: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 $130,000 and
equipment valued at $140,000 as well as $60,000 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 10 percent of the beginning capital balance for the year.
• O'Donnell will also have added to his capital account 10 percent of partnership income each year (without regard for the preceding
interest figure) or $4,000, 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 $7,000 annually or 15
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, 2017, Terri Dunn becomes a third
partner in this business by contributing $26,000 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 6:4 basis between Reese and Dunn, respectively.
Partnership income for 2017 is reported as $100,000. 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 $175,000 directly to Dunn. Net income for 2018 is $99,000 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.
![No
1
2
3
4
5
6
Date
01/01/2016 Building
12/31/2016
01/01/2017
12/31/2017
12/31/2017
01/01/2018
Equipment
Cash
Goodwill
Reese, capital
O'Donnell, capital
O'Donnell, capital
Income summary
Dunn, capital
Reese, capital
O'Donnell, capital
Dunn, capital
Reese, capital
Cash
Goodwill
Reese, drawings
O'Donnell, drawings
Dunn, drawings
Income summary
Reese, capital
O'Donnell, capital
Dunn, capital
Goodwill
Dunn, capital
General Journal
Debit
130,000
140,000
60,000
330,000
43,000
26,000
137,500
43,050
55,050
24,525
100,000
Credit
330,000
330,000
37,000
6,000
163,500
43,050
55,050
24,525
31,980
46,700
21,320](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F33c7ad53-080e-4782-a7bc-5a50f00f94b6%2Fe606f2ed-dc0a-4ca5-b0e0-71a7f7c2b95e%2Flaa9c2n_processed.png&w=3840&q=75)
Transcribed Image Text:No
1
2
3
4
5
6
Date
01/01/2016 Building
12/31/2016
01/01/2017
12/31/2017
12/31/2017
01/01/2018
Equipment
Cash
Goodwill
Reese, capital
O'Donnell, capital
O'Donnell, capital
Income summary
Dunn, capital
Reese, capital
O'Donnell, capital
Dunn, capital
Reese, capital
Cash
Goodwill
Reese, drawings
O'Donnell, drawings
Dunn, drawings
Income summary
Reese, capital
O'Donnell, capital
Dunn, capital
Goodwill
Dunn, capital
General Journal
Debit
130,000
140,000
60,000
330,000
43,000
26,000
137,500
43,050
55,050
24,525
100,000
Credit
330,000
330,000
37,000
6,000
163,500
43,050
55,050
24,525
31,980
46,700
21,320
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