 Hello in this lecture we will work a problem in which we will add a new partner to an existing partnership in a prior lecture we talked about having a partnership sell a partnership interest to another partner so one partner leaves another partner comes in and this section we will talk about having the same partners there and then adding a new partnership so the question will be here this will give us the information we're going to put that information into a worksheet like so populating the blue areas we will then record the journal entry in this section of this blue area here with the debits and the credits for the journal entry we're then going to post that to a quick worksheet here so that we can see what happens in context in relation to some other accounts being cash assets liabilities equity this is where we're going to focus because of course the equity part of a partnership is the partners so we got the partners here their capital accounts then we have revenue and expenses in this worksheet we could see that we are in balance by the assets or the the debit balance accounts not having brackets or being positive numbers for excel minus the credits means that they add up to zero so the debits minus the credits equals zero therefore we're in balance going to be a quick way for us to see and analyze what happens within context we will then post our information here and see what happens to the ending trial balance as we go we also have the accounting equation over here as we can take a look at assets equal liabilities plus the equity and see what changes happen to the account equation as we work through this problem all right so we've got the partnership as a new partner well first let's take a look at the ratio so we have the original partners being m b and l they share their partnership profit and loss with a three to five ratio so first thing we want to do is break out that three to five ratio we might be thinking why don't we just call it percentages and there could be some situations where percentage is not exactly even and a ratio is more precise therefore ratios can be a good way to post this information or record this information we need to know how to convert this ratio format to some type of percentage so the way to do that i'm going to go over here to m and we're going to say that this equals m's portion which is three out of the total three plus two plus five is ten so divided by we can even do that by divided by three plus two plus five so three over ten three divided by ten thirty and we if we want to make out a percent we can go to the home tab we can go to the numbers group we can percentify it to thirty percent b gets two out of the total of ten so we can say that equals two over the total of three plus two plus five and that will equal i forgot the divide sign divided by and that will equal 20 percent and if we go to the home tab numbers group percent make that a percentage and then l of course has five out of ten so we're going to say this equals five divided by the three plus two plus five brackets that will give us 50 percent once again we can go to the home tab numbers and percentify that and then if we add these up the 30 plus 20 plus 50 100 if we total that up in the total column that'll verify that we are at 100 percent equals s u m we're going to sum up or add up these three columns the 30 plus the 20 plus the 50 we'll add up to one yeah because we need to fix the cell and put that to 100 so we're going to go to the home tab numbers and 100 percent so it happens to work out evenly three to five ratio means that we're having 30 percent m 20 percent b 50 percent l now what we want to do is implement or add r to the partnership so r is going to come into the partnership and r is going to get we agreed on the partnership agreed on we should say that 25 percent interest to r in exchange for r paying the partnership 140 thousand dollars so r is going to pay 140 thousand and we are going to give the partnerships going to give r a 25 interest so let's see what that will look like so before we post any more of this worksheet let's take a look at what we have in terms of a chart of accounts over here so if we look at the chart of accounts we are seeing that we're going to put r basically on the books r's paying cash so if we start to think about the journal entry we could say well our first question is always is cash affected yeah that's affected we know that's going to do something to cash so cash is going up for the partnership because the partnership is receiving cash and so we're going to copy the cash and cash has a debit balance we're going to make cash go up by doing the same thing to which in this case will be another debit so that much we know so i'm going to copy that i'm going to put that on top in our journal entry we're going to say we're going to debit cash in i46 right click paste it 123 not here pasting the values only and then of course we said that the partner is going to pay the partnership 140 thousand so the partner is going to pay the partnership 140 thousand who's the partner that is is coming into the partnership r r is the new partner so we would need to increase r's capital account in order to allow r into the partnership so we know that we're going to credit r's capital account because r is going to have if r's paying and and being implemented a 25 interest we need to increase the capital account so capital counts you can see all have credit balances we need to go make it go up we're going to do the same thing to it which is another credit so we know we're going to credit r's capital so i'm going to copy that and i'm going to paste it right here in i47 right click and paste 123 now we know it's going to be a credit but the trick is that we're not sure it's going to be 140 thousand because the problem said we're going to give a 25 interest for the 140 thousand therefore what we need to do is figure out what is a 25 interest in the partnership and we know that the total equity represents assets minus liabilities so in this case the cash of 550 minus the liability of 10 is of course 540 equals the equity of 540 so you would think that at this point in time a 25 interest would be 540 thousand times 0.25 25 percent interest so you would think we put them on a book at 135 but we have to add to that the fact that there's cash cash came in on top of this so cash is going to go up which increases the book value so let's think about that in terms of our worksheet over here try to see what we need to record in terms of the capital account for r so if we think about what we have so far this is our total capital this is what's recorded on the trial balance for capital for mb and l partners and we know that another 140 thousand is going to be implemented into the partnership when r comes into the partnership therefore the capital account the net assets are going to go up by of course 140 therefore we're going to add this up we're going to say this equals the original net value of the partnership plus the 140 thousand that the new partners now implementing gives us a total of 680 thousand then we're going to say that's now the new value of the partnership and we are now adding the new partner at 0.25 25 percent we're going to give a 25 percent of the book value or the total equity section which represents the book value of the company to the new partner so 25 percent if we want to see that in the form of a percent of course home tab numbers group and percent it and that means that the new partner needs to be on the books at this uh 680 times the 25 percent so the new partner is going to be on the books at 170 so that's the answer to this question over here we're going to put the new partner on the books at a credit negative in this worksheet 170 thousand all right so that we have that now of course we have this other issue in that the debit doesn't equal the credit so the credit is higher than the debit by 30 000 and the reason for that is of course if if we're going to put the new partner on the books for 170 and they only paid 140 then the other three partners are going to have to split the difference so we're going to have to have a debit of 30 000 what account will that 30 000 go to well it's going to go to m b and l do they necessarily like this uh this situation no because their capital accounts are going to go down we're going to debit their capital accounts reducing their capital accounts because they basically are giving more of their interest to r than what r is paying now you might be thinking why why would why would they do this why would they allow uh r to have a 170 interest when r only paid 140 why wouldn't they make you know that that even out and the reason there could be multiple reasons for it maybe the partnership is thinking that not all the assets are represented properly really within the the financial statements there could be intangible assets or liabilities that aren't really represented in terms here it could also be that they think that r is is coming in to the partnership with a lot of their own personal assets that will increase revenue in the future and therefore it is worth allowing r on the books and giving a larger portion of the interest than r is paying into the company because of the potential future growth just based on who r is and and that could be a reason as well but in any case that's what's going to happen and therefore we're going to have to reduce these capital accounts for the other three partners how are we going to do that we're going to do it in accordance with their profit sharing ratios which we decided were 30 20 and 50 so we decided that we're going to have to allocate the difference so i'm going to calculate that difference again we're going to say this equals the i'm going to do it this way the 170 that we're going to allocate to the new partner r minus the 140 that are put into the partnership which gives us that 30 000 that we're going to have to reduce the existing capital accounts by for m b and l so we're going to do that through this percentage ratio so we're in here for m we're going to take that 30 000 times m's 30 percent tab so we're going to reduce uh m's by 9 000 and then for b we're going to say this equals the 30 000 times the 20 percent for b so we're going to reduce b's capital account by six and then for l we're going to say the 30 000 times the 50 percent and into we're going to reduce his capital account by 15 if we add those up adds up to the 30 so this is how we're going to reduce that 30 that's the plug that we need for our journal entry so let's calculate what the new capital account will then be we know that r is going to be on the books for 25 percent which we said was the 170 over here so this is just the 170 and then m is going to be on the books for their current capital account minus the part of that 30 000 that they're going to have to eat in order to bring r in and we're going to say b's capital account is going to equal the 124 2 minus b's portion 6000 of that 30 000 they're going to have to eat and then we're going to say that l is going to equal the original of 264 6 minus the 15 000 at the 50 percent that l is going to have to eat and therefore this is going to be our new allocation if we add those up it's going to add up to 680 so i'm going to sum this up and add these up here and that should add up to 680 so at the end of the day as we post our journal entries r should be on the books at 170 m should be on the books at 142 2 b 118 2 and l 249 6 let's see if that's what happens when we do this so we're going to go back to our journal entry and we'll post our journal entries here and we said we were left with these debits that need to happen which was 30 000 we now know that we're going to break that 30 000 out between m 9 b 6 l 15 so i'm going to say m b l i'm just going to copy all of them i'm going to highlight right click copy put our cursor in i 48 right click paste 123 then for the debits remember they have to be debits because we need more debits in order to make this balance we're going to say this equals the nine for m enter and this equals the six for b enter and this equals the 15 enter so there's this is going to be our journal entry is it in balance let's see well the debits add up to 170 the debits minus the credits add up to zero so that we are in balance here now note that also i i have this credit up here and under a perfect world we would like to have all the debits on tops and the credits on the bottom again i want to point out that if it helps you to either build the journal entry and or to go back and audit what you have done later on i would abandon the rule of having debits and on top and the credits on the bottom however if you're putting this into a computer system into some kind of system that's that's required to have it in that format or if you have someone that's very picky that's going to review the format then you may want to uh put all the debits on top all right so let's post this out then we're going to post this over here and see if it does what we wanted to do what we wanted to do or what do we expect it to do we expect these capital accounts to line up with this information here all right so we're going to post cash first i'm going to go to 046 i'm going to say this equals and point to that 140 that's a debit this is a debit it's going to make the debit go up in the debit direction to the 690 we're then going to post ours capital accounts so here's ours capital account here here's ours capital account here here's the blue area related to ours capital account and we're going to say this equals and point to the 170 bringing the balance up from zero to 170 then we're going to post m's capital account so here's m's capital account here's m's capital account here it's a credit we're going to debit it that'll make it go down so we're going to say this equals the 9 000 that should make this go down to