 Hello, in this lecture we're going to work some smaller test type questions, questions that could be small enough to fit into multiple choice type formats. So we have here the following information is available for A's capital count in the partnership for a recent year. We've got the beginning of the year capital 60,000, this year of partner income 18,000, withdrawals made during the year 9,800. What is A's partner return on equity during the year in question? So in order to do that, we have to figure out what is the return on equity and the idea there is it's going to be the return on equity will be the income that was received for this particular partner, the 18,000 in this case, divided by the average partnership balance. And the average partnership balance remembers kind of like what was the average at any point in time during the years, kind of like what we're looking for. And in order to do that, we take the beginning balance plus the ending balance and we divide it by two. But we don't have the ending balance. So in order to do this, we're going to have to figure out what the ending balance is. Then we'll take the revenue applied and divided by the average. So let's first figure out what the ending balance is. So of course, we start off with the beginning balance and the capital count, which is the 60,000. And then we have the income that's been distributed to this particular partner a 18,000. And then we're going to say less draws. So that's going to be our typical kind of equity section formula for a partner or a sole proprietor, same type of thing. This is going to decrease and that'll give us our ending balance. So I'm going to sum this up. Obviously, if we were to put this into a calculator, it would be 60,000 plus 18,000 minus 9800. We're going to sum it up because this is a negative number. Therefore, if we hit equals the sum of the 60 plus 18 minus the 9800, that will give us our ending balance. I'm going to underline this 9800 by going to the home tab, font group and underline. So now that we have that, we can find the average balance. And the average balance is just going to be the beginning balance. I'll put that here. It's going to be the beginning balance plus the ending balance. So it's the beginning, I can do a little better than that. And the ending and we'll sum that up equals the sum. This is how we take an average, of course, and a home tab, font, we're going to underline that and we'll divide it by two. So we're taking an average of and kind of again, this is kind of an imperfect average. We're trying to see it because the balance sheet accounts are as of any point in time. So we're kind of trying to see, well, where would it be at like kind of the average at any kind of point in time within that time frame. So we're going to say the 1282 divided by two then is going to be this 64100, then now we can do our calculation. The calculation being income allocated income, that's good enough, which is this 18. And then we have the average balance and the equity count being this 64100. We just calculated going to go ahead and underline that here. And then we're going to divide that out, that's going to be equal to the income divided by that average equity balance. And of course, it doesn't equal zero, we're going to go to the home tab, we're going to go to the numbers, we're going to add decimals. Like so we can represent it in this format, we can represent it in terms of a percent, which would be 28. And if we add decimals 28.08. This one says that A and B formed a partnership with a contributed 60,000 and B contributed 40,000, they cash their partnership agreement calls for income loss division to be based on the ratio of capital investments. So a sold one half of his partnership interest to C for 66,000. When his capital account had 89,000, the partnership would record the admission of C into the partnership as what now this one's one of those ones where it's the whole confusing thing on this is they gave us more information than we really need. And the thing to note on if a partnership sells their partnership. The interesting thing is the thing that we have to keep in mind is was the cash received by the partnership, meaning did the partnership bring in the new partner or did the partner receive the cash, meaning the cash isn't going to the partnership at all. So in order to first ask this question, I would ask the question with any journal country is, is cash affected in this transaction? And in this case, for the partnership, the answer is no. Even though C is paying 66,000 for a partnership interest, the payment is going to the partner. It's going to partner A. Partner A is putting it in partner A's pocket, not into the bank account of the partnership. And he's giving up part of the partnership for that. So it's actually more straightforward than we might think. We would say, well, C's got to be going on the books and A's got to be going off the books. So A's capital, capital has a credit balance and A's got to bring their capital balance down. And if A had a capital balance of the 89,000, we're going to debit it by doing the opposite thing to it. And we're just going to say, OK, A, you sold half of it. We're just going to say the 89,000 divided by two. And so we're going to say 44,5 is going to what we're going to reduce A's capital for. Then we're going to credit something. And we're going to credit something. And of course, the something that is the new partner that goes on the books, C capital. C capital account and C's capital is going to go up by the 44,6. Now the thing that's confusing about this is there's some stuff that we just don't know about the agreement, which is kind of something that we would like to know. One is, well, why if C is going to go on the books for 44,5 did C pay A, the partner, 66,000? And that's between A and C. It's not between the partnership. So C and A decided that 44,000 was worth the capital allocation of a 44,500. What that indicates is that there's something on the balance sheet or not on the balance sheet in terms of basically assets or whatnot that's not reflected. And therefore, C was willing to pay more in order to get the 44,500 worth of the agreement. It's also not clear in terms of what the new profit sharing will be after C is on the books. The prior profit sharing being in terms of the capital count, they may have changed it when C was on the books. But we don't really know that and it doesn't really affect this actual journal entry and that's kind of the tricky thing about this type of problem. Next one says we're talking about a partnership agreement here and we have A's capital count at the beginning with a balance of 46,700 during the years A's shares of partner income with 9,200 and A received 5,700 in distributions from the partnership. What is A's partner return on equity? So in order to do that we need to know what is the partnership return on equity formula and what we're going to do on that is we're going to take the income distributed to A and divide it by his average equity balance. And of course, average is again, it's kind of a weird term in terms of equity because when we're talking about equity, we're talking about a point in time. So we're trying to figure out, well, what might the average kind of be at any kind of point in time within the timeframe? So we're going to take the beginning average and then we're going to add it to the ending average and we're going to divide it by two and that's how we're going to come up with that. So they've given us the beginning average, we have the income, we don't have the ending balance in the equity account. Therefore we're going to have to calculate that first. So let's take the, we're going to take the beginning balance. This is just like a sole proprietor that we're going to calculate for a partnership. They gave us the same kind of calculation. We're going to take the beginning balance plus the income that was allocated minus the draws that gives the ending balance. So we've got the 467 beginning balance plus income that was distributed to partner A here of 9-2 and then we're going to reduce that by the draws and A receive five and distribute draws or distributions, whatever we want to call it. That's the money that A is receiving, taking out of the company. That's going to reduce the capital account. If we were to put that in our old calculator here, then of course we would just be saying 467 plus 9-2 minus the 5-7, giving us the 50,002. We're going to calculate it here with the good old sum function. We can use the sum function because this is a positive, this is a positive, minus the negative. So we're going to say this plus this minus that within our sum function, giving us that 50,002, that's the ending balance. Now in order to figure out the average balance in the account, then we're going to take the beginning balance, which is this 467. We're going to take the ending balance, which is this 50,200. We're going to underline that home tab font underline and I'm going to add those up with the sum function, adding those up and then we're going to divide by 2. So that's basically the average of this that we're going to calculate. And again, that term average always kind of was strange to me because applying the average here, what we're really doing is just kind of seeing what that average would be or what it might be at any point in time within that time frame. So we're going to take this divided by 2 and that gives us the amount that, you know, it might be at any given time given these two points in time. And then we can do our calculation for the ratio and the ratio will be the income that was allocated, income that was allocated being this 9002. And we're going to divide that by the average balance that we came up with, which was this 48,450. We're going to underline that home tab font underline and divide that out. So we're going to say the 9002 income divided by the average equity balance gives us our return, our return on basically the investments. We're going to say go to the home tab numbers, going to increase the decimals on that. So it could be that or if we add the percent, it could be that. And then we could add the decimals. So just remember that obviously rounding will affect a lot of ratios and why not keep rounding in mind, look at the problem, how far out are they asking to round it to, and make sure that that doesn't affect you in a negative way. Make sure you know, get the rounding right.