 Hello in this lecture, we will be working with a problem with a partnership where one partner is selling the partnership interest Either to another individual another partner or selling it to the partnership itself We're gonna have a couple scenarios. We have three scenarios that we will work through on this We're gonna have the information for the problem on this side We will then input that information into a worksheet here Then we'll put that information into a journal entry see what the journal entry would be related to these transactions and then have a trial balance that will post those journal entries and See what happens in relation to other accounts. We have a very simplified trial balance We can concentrate of course on the capital accounts in our partnership. So we have assets here We have our liabilities the capital accounts of where we're gonna focus They will populate once we start to enter information into this worksheet. Then we've got revenue and expenses down here We're gonna post our beginning balance, which will populate once we put in the beginning capital numbers Then we're gonna see what happens and we're gonna get a quick entry so that we could see what happens within a balancing area of the trial balance in the ending balance over here, then we can also check out the Accounted equation where we have assets equal liabilities and owners equity and see how that should stay in balance as we post Through this as well. Alright, so let's see what we have here first the most simplified Transaction of the ones we'll take a look at record journal entries and post transactions to the trial balance so the partners are MB and L partners share income and loss in a 3 to 5 ratio now First thing we're gonna have to decide what does that mean 3 to 5 ratio here? This is one way that we can present the ratios if we had two partners Obviously the the most simplified way of saying the split would be something like a 50-50 split But some sometimes it actually would be better to have a ratio analysis such as this if for example the Percentages are not exactly even so in this case what the way we're gonna calculate the percentages is will add them up So three two and five out to ten and then we're gonna say well the first partner It has three out of the total of ten. So if you see some Written out like this, then the way we can calculate it is we're gonna say for M We have three out of a total of three plus two plus five ten three divided by ten and that will give us our percentage now, of course, I have it in the Format of a decimal in this case if we wanted to make it a percent we could go up here into the home tab and go to numbers group We can hit percent thirty percent. So then we're gonna have B So B has the two the two part of it So we're gonna say this equals two divided by the total three plus two plus five ten and that will give us a 20.2 if we want to make it a percent we go to the home tab alignment Percentage twenty percent then Elvin is gonna have the five over ten So we're gonna say this equals five over ten and that will give us point five And if we want to make that a percent we'll hit that percent sign if we add these up I can highlight these three the thirty the twenty the fifty adds up to of course 100% I'm gonna sum that up over here just to prove ourselves that that works out screen equals SUM Double-click on that some function highlight the thirty the twenty the fifty and enter so we have that information We're gonna start with the beginning capital balances. I'm gonna give us the beginning capital cap balances for this particular problem So there we have them there and these will be the beginning capital balances note that that will then populate our worksheet over here So in our beginning capital gap balances for MB and L we have 151 to 124 to 264 six respectively note that in a partnership I it doesn't necessarily have to be that the This for example for M is thirty percent of the total that does not have to be the case Because the draws might differ there what does have to be the case is this is basically the percentage Ratio for net income allocation. So when we think about allocating the net income It's in accordance to these percentages. However, the Total in the capital count may not be and most likely will not be 30 for M in this case of the total So keep that in mind as we go through this problem in this first scenario. We're saying that B Sells capital interest to new partner in after the transaction was approved by the other two partners So B here wants to sell a partnership and they're going to sell it to another individual in so the other individual We need to have approval from both M and L In order to allow the new partner in if they give the approval then Note where the transaction is happening here. It's happening really between B And the new person in who isn't in the partnership yet So the actual transaction the money's Exchange in hands when we ask our first question, which is always is cash affected in this case No, it's it's not affected because the money is going to be partner Not the partnership and therefore B is selling their partnership interest Directly to the new individual and the new individual is going to get the capital So really in terms of the partnership and again the other partners have to agree with this But in terms of the partnership all that's happening Is that this B capital account is now going to be Going to end so we need to take B off the books B's gone as far as partnership is concerned And is now in its place Therefore, uh, we can say well in needs to go up We need to increase in and we need to decrease the B capital account So we can look at the B capital account and say well B is on the books at 124 to be sold The shares there therefore that needs to go down to zero. How do we make something go down to zero? We do the opposite thing to it, which in this case would be a debit This is a credit represented by the brackets around it We need to do the opposite, which is a debit to make it go to zero So i'm going to copy this i'm going to right click and copy go up to i4 Right click and paste it one two three. So we're just going to paste the values only not the rep not the sell pasting it one two three And then we're going to credit of course the uh New partner in capital accounts. So in needs to be on the books in is of course at zero We have we're making a new account for n and so we have to make it go up We're going to make it go up in the credit direction Therefore, we're going to do the same thing to it as what it is all capital accounts have credit balances We're going to credit it again making the credit go up for n So i'm going to copy that We're going to put that on the bottom because credits generally go on the bottom right click and paste it one two three Now the confusing thing about this is is that if we look over here, it says well b got Uh one hundred and twenty dollars, but the capital account says that uh, there's One twenty four two in there and so those don't match obviously that b got a different amount of money Then the capital account is saying the capital account is basically worth And that's that's probably going to happen It generally is not going to be perfect in in terms of of the money We will be using in terms of the partnership the one twenty four two So what happened between Um b and n is they negotiated the price that they believe the Partnership interest is worth and we are going to then transfer the partnership interest Over to uh from b to n so you might be asking well, why how could that happen? Why would um We ask for a price or sell partnership interest for something other than The capital account which should represent the value of the company and and of course they're Because if we take the assets minus the liability The value the company should be the five forty and one twenty four two of that is allocated to b So why would b sell it for less than the capital account value? And the reason there could be different reasons for that But part of it could be that there's some types of intangible assets that that are involved in it It could be that's you know b has to has to go and and is pressured to leave Uh in a more timely fashion So there could be various reasons for that But the sales price does not have to match the amount in the capital account In this case, we're going to take the amount in the capital account one twenty four two Because that's the amount that we need to transfer from b to take b to zero And transfer to n so we're going to have a debit and a credit I'm going to represent the credit with a negative number So notice when I put the negative here and put negative of that So or you put just a negative one twenty four two I'm going to put negative of that so I want that I want to flip the sign That'll put the credits around it because of the format of the sell in excel And so now I'm going to scroll over here and we're going to post that so we can see everything So we're going to scroll down here and obviously we are in The b's capital account in sell seven We're going to select equals point to that one twenty four two What's going to happen b's going to go down to zero, which is what we want because uh b is now gone And no effect. I mean now we're out of balance. No effect on net income now. We're going to go to n in o nine equals the one twenty four two and once we hit enter we'll go back in balance and We'll be at one twenty four two four in So no all we did was move the capital account balance from here to here and now in is in there. That's the most simplified Uh Method that we will have just remember that uh, the amount that we're going to need is what is in the capital account not Uh, the sales price move it up. I've got the second scenario down here So now we want to take a look at the second scenario where we have the same starting information But now we have the b sells capital interest to the partnership for cash of two hundred thousand So now instead of selling it to a third party We're going to sell the partnership interest actually to the partnership So the partnership is going to pay The b for the partnership interest in the amount of 200 000 at the end of the day We're going to go from three partners down to two partners b is going to be basically bought out by m and l so first off i want to take a look at the uh Journal entry and then go back to The worksheet here to see what we're going to have so first question is cash affected And and the answer here is yeah, the partnership is paying b in order for uh b to acquire these capital interests So therefore the cash is going to go down Cash has a debit balance. We need to make it go down. How do we make something go down? We do the opposite thing to it which in this case would be a credit So we're actually going to credit cash to reduce cash So let's think about that first going to copy that I'm going to put that on the bottom So I'll put it right there in sell i 18 right click and paste it one two three Cash is going to go down. How much is it going to go down by the amount that the partnership will pay In terms of the agreement was 200 000 and that that number of where did they come up with the 200 000? They negotiated for the 200 000. So we're going to say credit I'm going to put a negative of 200 000 to represent the credit and when we hit enter it'll put brackets and the comma in there So that's that's going to be the credit and then what's going to happen is we want to reduce b's capital account to zero So here's b's capital account b is now gone. Therefore that capital account needs to go away Now note that there's not 200 000 in there and once again We would think that in a perfect world the capital account would represent the value of the business But in this case the capital account is 124 2 which is a lot less than the cash that the partnership is willing to pay to buy b's capital balance out Again, there could be multiple reasons for this there could be intangible assets in the business that aren't reflected in the business and or The asset prices may need to be revalued. That may be why there is a difference here between the value of the capital account and The value that is being paid out could be who could just be that that m and l really want to Go on with business without without being our willing to pay a premium to do that But for any instance that that could very well happen We need to take b off the books at this amount. However, so b's on the books at 124 2 And that's a credit. We need to make that to go down. So how do we make something go down? We do the opposite thing to it which in this case would be a debit So i'm going to copy that i'm going to put that on top and i'm going to right click and paste it 1 2 3 So there's the debit the debit's going to be for 124 2 Not 200 000 and then of course we have a difference here. We have a difference if we highlight both of these We're going to need more debits of 75 8 So where are those going to go? They will go to the remaining two partners, which is m and l so m and l are going to have to Reduce their capital account by the difference Now how are we going to do that now? We're going to take a look at the worksheet and say well How are we going to split that difference between those two partners? Well, we know that B is going to go away and we had a 30 20 50 split So one way we can think about this is we can have a new ratio What's the ratio going to be after b is gone? It could be we could think of equals The three Over in this case we had three out of ten and now b is gone. So we got three out of eight three over eight Now after b is gone and that gives us point three seven five If we make that a percent we go to the home tab Numbers percent there we have it. How about l l was five out of ten And now l is going to be five out of eight because we because b's gone So five out of eight five and three. So we're going to say this equals five over divided by eight And we will come up with Point six two five. We want to make that a percent home tab Numbers group percentage there we have that so we could break that that Difference out in that format now. What's the difference going to be the difference? We need to break out It's going to put that here equals