 Hello and welcome to this session. This is Professor Farhad in which you would look at the admission of a new partner. This topic is covered in financial accounting as well as advanced accounting. Also the CPA exam, the FAR section. In my advanced accounting course I go a little bit into details into this topic. As always I would like to remind you to connect with me on LinkedIn if you haven't done so YouTube is where you would need to subscribe. I have 1700 plus accounting or I think tax finance as well as Excel tutorials. If you like my recordings please like them, share them. It doesn't cost you anything. Subscribe to the channel and connect with me on Instagram. If you're looking for additional resources check out my website farhadlectures.com. If you're looking to complement or supplement your accounting courses or pass your CPA, CMA or EA exam. If you're looking to add 7 to 10 points on your CPA exam. So we're looking at here at admission of a new partner. So a new partner can acquire partnership interests. So basically they can basically buy the new partnership either from the other partners. So let's assume we have a partnership with four individuals. One, two, three and four. And we have this individual here would like to join the partnership. So one way to do so is to buy the interest of three, the whole interest of three or part of the interest of three. And this individual will be part of the partnership. So that's part of it. Okay. So you buy the interest of the other partner or you invest assets in the partnership. So rather than buying three, three will remain partner one, two, three and four. Then you will add yourself. So this individual will join the partnership as the fifth partner. So this is the way you can join a partnership. Now the question is the partnership dissolve once a new partner joined. That's a legal question. I try not to answer this question in my course. So basically what we're looking for is somebody joining the new partnership. So let's start to start by looking at a new partner buying interest from an existing partner. You remember one, two, three. Now you're buying. So if we have one, two, three and four, you are buying three out and you're replacing three. So you're replacing partner three. So the cash goes to the partners, not the partnership. So who's going to get the cash? The partnership doesn't get the cash. Partner three gets the cash. So they become a partner. You must be accepted by the other partners as well. That's obvious. The best way to illustrate this is to look at an example to show you how this all works. So we have on January 5th, Perez sells one half of his partnership. He didn't sell everything. He sold one half to T. Rashid for 18,000. Perez gives up 13,000 of recorded interest in his partnership. So Perez prior to the sale, Perez's capital interest was 26,000. What Perez did, he decided to liquidate half of his partnership position and sell it to Rashid. So the partnership was not affected. Basically what happened, we took 13,000 from Perez and we gave it to Rashid and Perez got the money. So simply the partnership did not get any cash. So here's what happened. 13,000 went from Perez, went to Rashid. The total capital was 78 before this transaction. The total capital is still 78 after the transaction. Simply put, we debited. Perez's capital went down. Rashid's capital went up. So Perez sold some of his shares, but not the whole thing, half of his position. Let's take a look at the new partner can gain partnership by contributing asset directly to the partnership. So here we have partner 1, 2, 3 and 4. And now what's going to happen, we're going to have a fifth partner. The fifth partner is going to contribute the money to the partnership. So what's going to happen, the partnership assets and the partnership equity will go up. So both assets and equity. Now we have more capital and we have more cash or assets, whatever that new partner contributed. The best way to illustrate this is to look at an example. On January 4th, Rashid is admitted to the partnership with a payment of $22,000 in cash. So no, Rashid did not pay Perez. Rashid paid, contributed money to the partnership. So this is what the partnership looks like before Rashid joined Zane 52, Perez 26, total 78. What's going to happen is Rashid's going to add $22,000 in cash, which in turn increase the capital of the partnership by $22,000. And here's the new capital accounts Zane 52, Perez 26, Rashid 22. Notice the total capital of the asset, the total capital of the partnership increased. And the entry to record Rashid's joining the partnership is debit to cash. The partnership got the cash and credit Rashid's capital because both Rashid capital go up, which is equity, as well as the cash for the partnership. What happened when, oftentimes, oftentimes what happened when a new partner joins, one of two things will happen. Well, here nothing happened. Basically, you pay 22, you got 22. Sometimes you pay $22,000 and you get more than 22. Or sometimes you pay $22,000 and you get less than $22,000. So what's going to happen sometime? A bonus to the old or the new partners may be generated. What do I mean by this? Let's assume you really like a partnership and you are desperate to join them. What they would say, they would say, okay, we will give you an interest, but you have to pay premium for it. So let's assume we give you 50,000 worth of partnership interest, we want you to pay 70,000. So what happened that extra 20,000 that you paid goes to the old partners. They will split it in any way shape or form that they want to. Sometimes the partnership is so desperate for new partners because they need money or they need their human talent or they need their knowledge. What they would do, the new partner will say, okay, you will give me 50,000 worth of capital, I'll pay you 40,000 worth of money for it. Guess what? Then the other partners will have to pay a bonus. So the new partner gets the bonus. So the bonus could go to the old partners when the current value of the partnership is greater than the recorded amount of equity. The old partner usually requires the new partner to pay a bonus. So you want to join, we'll let you join, but you have to pay a premium. So if we're selling you 10,000 worth of equity, we want you to pay 15,000 for it. So that extra five is bonus to us. Sometimes it's the opposite. Sometimes the new person that's joining will have more leverage and the new person that would say, you want to give me 10,000 worth of equity, I'm going to pay you 5,000 for it. So the partnership may grant a bonus to a new partner if the business is in need of cash, if the new partner has exceptional talent. So the bonus could be to the new partners or to the old partners. And the best way to illustrate this is to look at an example. January 4th, Zayn and Perez agreed to accept Rashid as a partner upon his investment of 42,000 in the partnership. So Rashid is going to pay, so the cash amount is 42,000. Now we want to know, is that 42,000 going to get Rashid exactly 42, which is no bonus for anyone, more than 42,000 worth of capital or less than 42,000 worth of capital? Here we go. Rashid is to receive 25% ownership interest in the new partnership. Now the existing partnership interests, which is we have 52 and 26, which is 78,000. So the existing partnership interest is 78,000. And we're going to multiply this by 25%. So Rashid is to get, well, let's first find the whole new partnership. So the existing is 78, and Rashid's going to add 42,000. So the new capital, the partnership equity should be 120,000 in total. We are going to give Rashid out of this 25%. So 25% is only 30,000. So notice Rashid is paying 42, Rashid's getting 30,000. So as a result, we have $12,000 difference. This difference, it's going to be shared equally between Zayn and Perez. And this is what it looks like. So we have Zayn and Perez existing capital of 78. Rashid invested 42. Now the total equity should be 120. 25% of that goes to Rashid when we do the rebalancing. Rashid gets 30,000. Here's the journal entry to look at this. So the partnership got 42,000. We debit cash. We credit. Rashid's account 30,000, although he paid 42. And what happens, Zayn's capital will go up by six. Perez's capital will go up by six. So the old partners, they got the bonus, which is the remaining balance of 12,000 split between the two other partners. Let's take a look when the new, when the bonus goes to the new partner. On January 4th, Zayn and Perez agreed to accept Rashid upon his investments of 18,000. So the existing capital is 78. We're going to add 18,000 to it. And that's going to bring the capital balance to 96. And Rashid is to get 25%. 25% of this is 24,000. 24,000 for 18,000, that's a good deal for Rashid. So basically, Rashid is getting 24,000 for something that's that he paid for only 18. Here, it's the opposite. What's going to happen? We're going to debit the cash, 18,000. We're going to credit Rashid's account, 24. And what's going to happen the remaining, the 6,000 will have to come out of Zayn's capital and Perez's capital, 3,000 each. Why? Because they need Rashid. If you want me to join, I'll give you 18,000. You got to give me 24,000 of the capital. So I want 25% interest. So this is what happened here. The best way to illustrate these concepts is to work additional examples. So let's take a look at this problem. And here, we're going to be using ratios. And these ratios, oftentimes, they throw students like basically off a little bit. So we have A, P, and H, and Portia and Harrison, our partners, and share income and loss to three to five ratio. Now, when they're giving you those ratios, two, three, five, or four, to seven, to eight, or it doesn't matter what ratio, here's what you do. You take two plus three plus five equals to 10. Here they give, they're giving you easy numbers. So 210, 310, and 510. So 20%, 30%, and 50%. A20, P30, and H50. This is how the ratios work. The partners, and this is going to become very helpful when we do the partnership liquidation. The partners capital balance are as follow, and 300, P150, and H450. Allen is admitted to the partnership on May 1st, with 25% equity. Now they added a fourth person. Prepare the journal entry to record Allen's entry into the partnership under each of the following separate assumption. First, Allen invests 300, Allen invests 100, and Allen invests 700. So how do we work this problem? Let's start with the 300. So if Allen invested 300, here's what we have. A has 300, P150, H450. Now let's add them up. This is 300, 400, 800, 900. Existing plus 300. That's 1,200. Of the 1,200, what's going to happen? We're going to be giving 25%. We're going to be giving of the, sorry, actually increase the size of this. So of the 12,200, we're going to be giving 25% to Allen, which is equal to three 0.25 equal to 300. What does that mean? It means Allen invested 300 in this partnership, and Allen got 300. Is there a bonus to the old partners? No. Is there a bonus to the new partner? No. So what does the entry would look like? It would look like debit cash, credit capital. That's it for Allen. So simply put, let's take a look at the computation again. But simply put, we already find out what happened. So let me just erase this. So we have 900 plus 300 is 1200. We're going to take 1200 times, you know, 1200 times 25%. It's going to give us, we did the computation already. So it's going to give us exactly 300. Therefore, we debit cash and credit the capital account for Allen, and there is no bonus for anyone. No bonus for anyone. What's going to happen in scenario B? We're going to have 900 of existing capital plus 100 of new capital. The total capital is 1000. If we multiply this by 25%, Allen will get 250. However, Allen paid 100. So $150 of capital will have to be taken away from Anne, and Portia, and Harrison, 150. In a ratio of 2 to 3 to 5, 20%, 30%, and 50%. Let's take a look at how we do this. Simply put, we have, remember, we have 150, which is 250 minus 100. We have 150. And that's going to, 20%, it's going to be absorbed by Anne. It means that's $30. 30% of the 150 will be absorbed by P, which is 45, and 50% will be absorbed by H, which is 75. And this is the new capital, and Allen will join at 250 while she only paid $100. And this is what the journal entry would look like. Basically, we will debit cash 100 and debit the remaining balances for the other partners and credit Allen's account, 250. Not a bad deal for Allen. She paid 100, she got 250. In the third scenario, Allen paid 700. Now here's what's going to happen. In this scenario, we already have 900 worth of capital. She's going to pay 700. We're going to have in total 1,600. Allen's going to be getting 25% of that partnership. So what is 25% of 900? Let's take a look and compute this 1,600 times 0.25. They're going to give her $400. They're going to give her $400 of capital. That's $400. In reality, she paid, she paid 700. Therefore, the difference is $300. So what's going to happen? The other partners, their capital account will increase in total of 300, increase in total by 300, split out as 2 tenths, 3 tenths, and 5 tenths, which yes, which is 20%, 30%, 30%, and 50%. So let's take a look at this. Now here we have now the capital is 1,600. The extra is 300. 2 tenths goes to n, which capital of n will increase. Same thing would go with p and h. And here's the journal entry. Here's the journal entry on how to book this transaction. We'd have cash for 700. We're going to give Allen only 400. The 300 remaining, the 300 remaining right here, they'll be split as 2 tenths, 3 tenths, and 5 tenths. If you like this recording, please like it, share it, put it in playlist. If you are looking for additional resources, I always encourage you to visit my website to supplement your accounting education, especially if you want to pass your CPA exam. Study hard, stay safe, and in the next session we would look at withdrawal of a partner. Please subscribe and like this recording.