 Hello, in this lecture, we'll discuss partnerships and adding a new partner. Object is 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. The variation of the same problem, 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 if a 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 in time and investment happens, you would think we would credit ours 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. Well, 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 302050, 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 540. That's the book value of the company that is allocated to the partners in this way. And note, again, that 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%, 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 we that the new partner gave the partnership 270, we're putting the new partner on the books at 202,500. 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 202,500 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 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 good will, or something like that, that will will generate future revenue. And therefore, the new partner, partner R, may be willing to pay more than what is being allocated to them through the agreement. So once again, 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 675 difference. So if we look at the calculation here, what is happening is that the new partners is receiving 270,000 in cash, and they're giving R a 2025. Therefore, we have this 675 that we need to allocate to MB and L in accordance with their profit sharing ratios. So we get the 675 we're going to multiple times times point three 30% that gives us the 20,002 right there. And then we're going to do the same thing here. So we've got the 675 times bees capital account point to profit sharing gives us the 13 five there. And we'll do this one more time. And we have L. So we've got the 67 five times point five for L. And that would be the 33 750. Therefore, this 675 will be allocated to MB and L at 20,250 13 five and 33 750. respectively, if we take a look at the transaction, then our trial balance over here, we need to then increase the bound 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 270. That I'm sorry, the 2025 that we're putting are on the books for. And then we are going to increase the capital account balance from 151 to plus the 20,000 in this case, to the 171450. 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 reconciled. So there's the 2250 the 13 five the 33 750 to MB 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 our MB and L's capital accounts to be 2025 171 453 137 7 and 298 350 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 552 820. Then we post ours capital accounts. So here's the new partner going from zero, of course, up in the credit direction by 202500. The company now in essence kind of like O's are the 202500. And then M's capital account is going to go up in the credit direction. So the credit we're doing the same thing to it increase the capital account from 551 200 up by 20252 171 450. Then we've got bees capital account here. So B has a credit balance of 124 2 we're doing the same thing to it being a credit of 13 5 increasing the capital account to the 137 700. 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 264 6 by 33 750 to the nine of the 298 350. Now, of course, the assets and the cash minus the liabilities accounts payable will equal our new capital account balances, which will then add up to the 810. 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.