 Hello and this lecture will discuss partnerships and adding a new partner. Objectives we will be able to describe the process of adding a new partner to a partnership, create the journal entries to record the entry of a new partner to a partnership, define the effect of the journal entry to add a new partner on the trial balance accounts as well as explain the effect on capital accounts of adding a new partner to a partnership. Variation of the same problems same exact things can be very similar except for now we're going to bring a new partner are on the books same 25% interest that the partnership has agreed the partnership and the new partner have agreed on this and a market environment but the new partner is going to be on the books and give the partnership the 270,000 so now the agreement is that the partnership will give a 25% interest in the partnership in exchange for the new partner are giving the partnership 270,000 so let's see what the journal tree would look like same process I'm going to talk about the journal entry until we hit kind of a problem and then go through our worksheet to see if we can figure out and fix the problem so first of all of course the question that we always have is the cash affected in this journal entry of bringing the new partner in and of course yes the cash is going to be effective we're going to receive 270,000 in the partnership therefore cash is a debit balance we're going to make cash go up by doing the same thing to it which in this case would be another debit so we know that's going to be part of the journal tree we can put that lay that out in the front right up front we also know that the new partner is going to be be entering the partnership so the new partner put in 270,000 you would think that of course we would credit the new partner for the investment just like when we create an investment or any time an investment happens you would think we would credit our capital account which we will however we will not credit necessarily for 270 in this case we're going to credit for 2025 why that's that's going to be the question but why are we going to do that how are we going to come up with that let's do our worksheet in order to answer that question so what we have here is our 30-20-50 we won't go over calculating those ratios again that's of course the three to five ratio and we have our capital accounts balances which will be just these balances here so we've laid these balances out in terms of a table now for the three existing partners before the new partner enters note the capital account balance of 540 is equal to the book value of the company being the assets minus the liabilities assets minus liabilities by 40 that's the book value of the company that is allocated to the partners in this way and note again that the the reason we can do this is because we have closed out the revenue and expenses so there's a post closing trial balance this is basically balance sheet accounts that we're looking at so then the new partner comes on the books and it's going to give the partnership 270,000 therefore the book value the cash is going to go up the assets are going to go up by 270 and the assets minus liabilities then will be at 810,000 that means that our new capital accounts at the end of the day after the transaction has happened needs to be at 810,000 we said that the new partner was going to get a 25 interest of that therefore if we take that 810 times 25 percent that's the agreement that we have the new partner is going to be on the books for the 202,000 so that's where this number is coming from so now the new partner gave the partnership 270 we're putting the new partner on the books at 202,5 and you might be asking well why would the new partner agree to these terms why would the new partner I mean if the assets minus the liabilities equals the value in the company and the new partner is only going to receive 202,5 of value in the company why would the new partner then give the company or the partnership 270,000 and the reason for that might be well there could be some intangible assets on the books or maybe the the books are not valued exactly at fair market value as is perceived by the individuals in the transaction so maybe the current partnership has a good name and has good intangible assets being goodwill or something like that that will will generate future revenue and therefore the new partner partner are maybe willing to pay more than what is being allocated to them through the agreement so once again this these things will rarely match they could match that would be a very easy journal entry to make but more often than not they won't and the agreement will be something that will have to differ in this way now of course the difference being that the debits are greater than the credits we're going to have to add some credits here how are we going to add the credits who's going to receive the credits well this time MB and L are going to receive an increase in their capital accounts because they received more cash than they're allocating to the new partner so that means that we have this sixty seven five difference so if we look at the calculation here what is happening is that we have we the new partners is receiving two hundred seventy thousand in cash and they're giving are a two oh two five therefore we have this sixty seven five that we need to allocate to mv and l in accordance with their profit sharing ratios so we got the sixty seven five we're going to multiple times times point three thirty percent that gives us the uh twenty thousand two right there and then we're going to do the same thing here so we've got the uh sixty seven five times these capital accounts point two profit sharing gives us the thirteen five there and we'll do this one more time and we have l so we've got the sixty seven five times point five for l and that would be the thirty three seven fifty therefore this sixty seven five will be allocated to m b and l at twenty thousand two fifty thirteen five and thirty three seven fifty respectively if we take a look at the transaction then our trial balance over here we need to then increase the amount account balances like so so we will go up obviously r is going to be on the books for the amount allocated to r that two seventy uh that i'm sorry the two oh two five that we're putting r on the books for and then we are going to increase the capital account balance from one fifty one two plus uh the twenty thousand in this case to the one seventy one four fifty we're increasing the capital account balances in terms of a journal entry then to increase the credit balance we will then credit which of course is also the plug that we need in order to make this reconcile so there's the twenty two fifty the thirteen five the thirty three seven fifty two m b and l respectively which will increase their capital accounts let's see what that would look like in terms of the trial balance so here's that same journal entry here's that same worksheet let's see if it does what we expected to do when we post it to our worksheet here what do we expect it to do we expect r m b and l's capital accounts to be two oh two five one seventy one four fifty three one thirty seven seven and two ninety eight three fifty after we post the journal entry respectively so here's the cash cash is going up cash is a debit balance we're making it go up in the debit direction so it goes from five fifty two eight twenty then we post r's capital accounts so here's the new partner going from zero of course up in the credit direction by two oh two five hundred the company now in essence kind of like o's are the two oh two five hundred and then uh m's capital account is going to go up in the credit direction so it's a credit we're doing the same thing to it increase in the capital account from five fifty one two hundred up by twenty thousand two fifty two one seventy one four fifty then we've got b's capital account here so b has a credit balance of one twenty four two we're doing the same thing to it being a credit of thirteen five increasing the capital account to the one thirty seven seven hundred and then l's capital account balance has a credit balance we are going to do the same thing to it increasing that capital account balance from two six four six by thirty three seven fifty two the nine of the two ninety eight three fifty now of course the assets the cash minus the liabilities accounts payable will equal our new capital account balances which will then add up to the eight hundred and ten so we are now able to describe the process of adding a new partner to the partnership create the journal entries to record the entry of a new partner to a partnership define the effect of journal entry to add a new partner on the trial balance accounts and explain the effect on the capital accounts of adding a new partner to a partnership