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, 2022, O'Donnell Invests a building worth $102,000 and equipment valued at $40,000 as well as $38,000 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 10 percent of partnership Income each year (without regard for the preceding Interest figure) cr $4,000, whichever is larger. All remaining Income is credited to Reese. Neither partner is allowed to withdraw funds from the partnership during 2022. Thereafter, each can draw $8,000 annually or 15 percent of the beginning capital balance for the year, whichever is larger. The partnership reported a net loss of $7.000 during the first year of its operation. On January 1, 2023, Terri Dunn becomes a third partner in this business by contributing $12,000 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 2023 is reported as $72,000. Each partner withdraws the full amount that is allowed. On January 1, 2024, Dunn becomes ill and sells her interest in the partnership (with the consent of the other two partners) to Judy Postner. Postner pays $90,000 directly to Dunn. Net Income for 2024 is $71,000 with the partners again taking their full drawing alowance. On January 1, 2025, Postner withdraws from the business for personal reasons. The articles of partnership state that any partner may Icave 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. Required: 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. O'Donnell, capital Income summary 3 01/01/2023 Cash 4 12/31/2023 Goodwill Dunn, capital O'Donnell, capital Reese, capital Dunn, capital O'Donnell, drawings Reese, drawings Dunn, drawings 5 12/31/2023 Income summary O'Donnell, capital Reese, capital Dunn, capital 6 01/01/2024 Goodwill O'Donnell, capital Reese, capital Dunn, capital 7 01/01/2024 Dunn, capital Postner, capital 8 12/31/2024 O'Donnell, capital Reese, capital Postner, capital O'Donnell, drawings Reese, drawings Postner, drawings 9 12/31/2024 Income summary O'Donnell, capital Reese, capital Postner, capital 10 01/01/2025 Goodwill O'Donnell, capital Reese, capital Postner, capital 11 01/01/2025 Postner, capital Cash 000 000000 0000 0000 00 000000 0000 0000 00 40,000 7,000 12,000 78,250 88,250 18,425 × 4,000 × 4,000 × 72,000 16,425 × 4,000 × 4,000 × 65,000 4,200 × 2,800 x 90,000 → 90,000 295,040 × 295,040 x

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, 2022, O'Donnell Invests a building worth $102,000 and equipment valued at $40,000 as well as $38,000 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 10 percent of partnership Income each year (without regard for the preceding Interest figure) cr $4,000, whichever is larger. All remaining Income is credited to Reese. Neither partner is allowed to withdraw funds from the partnership during 2022. Thereafter, each can draw $8,000 annually or 15 percent of the beginning capital balance for the year, whichever is larger. The partnership reported a net loss of $7.000 during the first year of its operation. On January 1, 2023, Terri Dunn becomes a third partner in this business by contributing $12,000 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 2023 is reported as $72,000. Each partner withdraws the full amount that is allowed. On January 1, 2024, Dunn becomes ill and sells her interest in the partnership (with the consent of the other two partners) to Judy Postner. Postner pays $90,000 directly to Dunn. Net Income for 2024 is $71,000 with the partners again taking their full drawing alowance. On January 1, 2025, Postner withdraws from the business for personal reasons. The articles of partnership state that any partner may Icave 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. Required: 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. O'Donnell, capital Income summary 3 01/01/2023 Cash 4 12/31/2023 Goodwill Dunn, capital O'Donnell, capital Reese, capital Dunn, capital O'Donnell, drawings Reese, drawings Dunn, drawings 5 12/31/2023 Income summary O'Donnell, capital Reese, capital Dunn, capital 6 01/01/2024 Goodwill O'Donnell, capital Reese, capital Dunn, capital 7 01/01/2024 Dunn, capital Postner, capital 8 12/31/2024 O'Donnell, capital Reese, capital Postner, capital O'Donnell, drawings Reese, drawings Postner, drawings 9 12/31/2024 Income summary O'Donnell, capital Reese, capital Postner, capital 10 01/01/2025 Goodwill O'Donnell, capital Reese, capital Postner, capital 11 01/01/2025 Postner, capital Cash 000 000000 0000 0000 00 000000 0000 0000 00 40,000 7,000 12,000 78,250 88,250 18,425 × 4,000 × 4,000 × 72,000 16,425 × 4,000 × 4,000 × 65,000 4,200 × 2,800 x 90,000 → 90,000 295,040 × 295,040 x

Individual Income Taxes

43rd Edition

ISBN:9780357109731

Author:Hoffman

Publisher:Hoffman

Chapter11: Investor Losses

Section: Chapter Questions

Problem 2RP

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