Editorial Special Industries and Special Topics_12 docx

before deducting partners’ salaries; partners’ salaries are treated as a means of dividing partner- ship income.” 5 Dixon, Hepworth, and Paton, on the other hand, indicate that the interpretation of partners’ salaries should vary with the circumstances: Where there are a substantial number of partners, and salaries are allowed to only one or two mem- bers who are active in administration, there is practical justification for treating such salaries as oper- ating charges closely akin to the cost of services furnished by outsiders. This is especially defensible where the salaries are subject to negotiation from period to period and are in no way dependent upon the presence of net earnings. Where there are only two partners, and both capital investments and contributions of services are substantially equal, there is less need for salary adjustments; if “salaries” are allowed in such a situation it would seem to be reasonable to interpret them as prelim- inary distributions of net income—an income derived from a coordination of capital and personal ef- forts in a business venture. Between these two extremes there lies a range of less clear-cut cases 6 (iii) Bonuses. Where a particular partner furnishes especially important services, the device of a bonus—usually expressed as a percentage of net income—may be employed as a means of provid- ing additional compensation. The principal question that arises in such cases is the interpretation of the bonus in relation to the final net amount to be distributed according to the regular income ratio, as illustrated in the following example. Stark and Bruch share profits equally. Per the partnership agreement, Bruch is to receive a bonus of 20% of the net income of the firm, before allowing the bonus, for special services to the firm. If in a particular year the credit balance of the expense and revenue account is $27,000 before allowing the bonus, profits are divided as follows: Stark Bruch Total Bonus, 20% of $27,000 $05,400 $05,400 Balance equally $10,800 $10,800 $21,600 $10,800 $16,200 $27,000 If the bonus is to be treated as an expense item in the computation of the final net income, the $27,000 credit balance of the expense and revenue account represents both the bonus and the final net income. Hence the $27,000 is 120% of the net income, and the net income is 100%, or $22,500. Under this method the profits are divided as follows: Stark Bruch Total Bonus, 20% of $22,500 $04,500 $04,500 Balance equally $11,250 $11,250 $22,500 $11,250 $15,750 $27,000 (iv) Debtor–Creditor Relationship. At times, when a partnership is formed, a partner may not be interested in investing more than a certain amount of assets on a permanent basis. He, therefore, may make an advance to the partnership that is viewed as a loan rather than an increase in his capi- tal account. The firm may thus obtain the initial financing it needs without having to negotiate with an outside source on less favorable terms. The loan may be interest bearing and may be repayable in installments. As noted by Meigs, Johnson, and Keller (1966), interest charges on such loans 40.2 ACCOUNTING FOR PARTNERSHIP OPERATIONS 40 • 9 5 Norman M. Bedford, Introduction to Modern Accounting (Ronald Press, New York, 1962). 6 Robert L. Dixon, Samuel R. Hepworth, and William A. Paton, Jr., Essentials of Accounting (Macmillan, New York, 1966). should be treated as an expense of the partnership, and the loan itself should be disclosed clearly as a liability of the firm. Occasionally, a partner may withdraw a sum from the partnership. This type of transaction should be treated in the manner dictated by the circumstances. If the loan is material relative to the partner’s net personal assets, if no repayment terms are stipulated, and if the loan has been long outstanding, the loan is, in effect, a withdrawal and should be viewed as a contraction of the firm’s capital. If, on the other hand, the partner has every intention of repaying the sum, the loan may be regarded as a valid receivable. (v) Landlord–Tenant Relationship. In some cases, a partner may rent property from or to the partnership. Transactions of this type should be handled exactly as rental agreements with others are handled. The only possible difference in recording this type of event would find the rent receivable from a partner being debited to his drawing or capital account instead of to a “rent receivable” account. If the rent was owed to the partner, the payable could be recorded as a credit to either the partner’s drawing or capital account. To minimize the possibility of confu- sion, it is preferable to record rental transactions with partners in the same manner as other rental agreements. (vi) Statement Presentation. Receivables and payables arising out of transactions between a partner and the firm of which he is a partner should be classified in the balance sheet in the same manner as are receivables and payables arising out of transactions with nonpartners. However, any such receivables and payables included in the balance sheet should be set forth separately; they should not be combined with other receivables and payables. SFAS No. 57 indicates that receivables or payables involving partners stem from a related party transaction and, as such, if material, should be disclosed in such a way as to include these four: 1. The nature of the relationship(s) involved 2. A description of the transactions including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the trans- action on the financial statements 3. The dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period 4. Amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement 7 (e) CLOSING OPERATING ACCOUNTS. The operating accounts are closed to the expense and revenue account in the usual manner. That account is then closed by crediting each partner’s capital account with his share of the net income or debiting it with his share of the net loss. The drawing ac- count of each partner is then closed to the respective capital account. (i) Division of Profits Illustrated. The articles of copartnership of (the fictitious firm of) Ahern and Ciecka include the following provisions as to distribution of profits: Partners’ loans. Loans made by partners to the firm shall draw interest at the rate of 6% per annum. Such interest shall be computed only on December 31 of each year regardless of the pe- riod in which the loan was in effect. 40 • 10 PARTNERSHIPS AND JOINT VENTURES 7 Financial Accounting Standards Board, “Related Party Disclosures,” Statement of Financial Accounting Standards No. 57, FASB, Stamford, CT, 1982. Partners’ salaries. On December 31 of each year, salaries shall be allowed by a charge to the ex- pense and revenue account and credits to the respective drawing accounts of the partners at the following amounts per annum: Ahern $14,400; Ciecka, $12,000. Partners’ salaries are to be al- lowed whether or not earned. Interest on partners’ invested capital. Each partner is to receive interest at the rate of 6% per annum on the balance of his capital account at the beginning of the year. Such interest is to be al- lowed whether or not earned. Remainder of profit or loss. The balance of net income after provision for salaries, interest on loans, and interest on invested capital is to be divided equally. Any loss resulting after provision for the above items is to be divided equally. On December 31, the books of the partnership show the following balances before recognition of in- terest and salary adjustments: Sundry assets $309,000 Sundry liabilities $066,000 Ahern, capital $120,000 Ahern, drawings $015,000 Ciecka, capital $060,000 Ciecka, drawings $009,000 Ciecka, loan $030,000 Expense and revenue $000,000 $057,000 $333,000 $333,000 Balances of the capital accounts on January 1 were: Ahern $105,000; Ciecka $48,000. The loan from Ciecka was made on April 1. Division of profits is as shown in Exhibit 40.1. (ii) Statement of Partners’ Capitals Illustrated. Formal presentation of the activity of the partners’ capital accounts is often made through the statement of partners’ capitals (Ex- hibit 40.2). (f) INCOME TAXES. According to Hoffman: Unlike corporations, estates, and trusts, partnerships are not considered separate taxable enti- ties. Instead, each member of a partnership is subject to income tax on their distributive share of the partnership’s income, even if an actual distribution is not made. (Section 701 of Sub- chapter K of the 1954 Code contains the statutory rule that the partners are liable for income tax in their separate or individual capacities. The partnership itself cannot be subject to the in- come tax on its earnings.) Thus, the tax return (Form 1065) required of a partner ship serves 40.2 ACCOUNTING FOR PARTNERSHIP OPERATIONS 40 • 11 AHERN AND CIECKA, PARTNERSHIP Schedule of Division of Net Income For the year ended December 31, 20XX Total Ahern Ciecka Interest on loan $01,350 $01,350 Interest on capital 9,180 $6,300 2,880 Salaries allowed 26,400 14,400 12,000 Remainder—equally $20,070 $10,035 $10,035 Profit earned $57,000 $30,735 $26,265 Exhibit 40.1 Division of profits. only to provide information necessary in determining the character and amount of each part- ner’s distributive share of the partnership’s income and expense. 8 Some states, however, impose an unincorporated business tax on a partnership that for all practical purposes is an income tax. 40.3 ACCOUNTING FOR CHANGES IN FIRM MEMBERSHIP (a) EFFECT OF CHANGE IN PARTNERS. From a legal point of view, the withdrawal of one or more partners or the admission of one or more new members has the effect of dissolving the original partnership and bringing into being a new firm. This means that the terms of the original agreement as such are not binding on the successor partnership. As far as the continuity of the business enterprise is concerned, on the other hand, a change in firm membership may be of only nominal importance; with respect to character of the business, operating policies, relations with customers, and so on, there may be no substantial difference between the new firm and its predecessor. To determine the value of the equity of a retiring partner or the amount to be paid for a specified share by an incoming partner, a complete inventory and valuation of firm resources may be required. Estimation of interim profits and unrealized profits on long-term contracts may be involved. In any event, there should be a careful adjustment of partners’ equities in accordance with the new relation- ships established. A withdrawing partner may continue to be liable for the firm’s obligation incurred prior to his withdrawal unless the settlement includes specific release therefrom by the continuing partners and by the creditors. A person admitted as a partner into an existing partnership is liable for all the obligations of the partnership arising before his admission as if he had been a partner when such obligations were in- curred, except that this liability shall be satisfied only out of partnership property. (b) NEW PARTNER PURCHASING AN INTEREST. It is possible for a party to acquire the inter- est of a partner without becoming a partner. A member of a partnership may sell or assign his interest, but unless this has received the unanimous approval of the other partners, the purchaser does not be- come a partner; one partner cannot force his copartners into partnership with an outsider. Under the Uniform Partnership Act, the buyer in such a case acquires only the seller’s interest in the profits and losses of the firm and, upon dissolution, the interest to which the original partner would have been en- 40 • 12 PARTNERSHIPS AND JOINT VENTURES AHERN AND CIECKA, PARTNERSHIP Statement of Partners’ Capitals For the year ended December 31, 20XX Total Ahern Ciecka Balances: January 1 $153,000 $105,000 $48,000 Add: additional investments 27,000 15,000 12,000 net income for year—per schedule $057,000 $030,735 $26,265 Total $237,000 $150,735 $86,265 Less: withdrawals $024,000 $015,000 $09,000 Investment, December 31 $213,000 $135,735 $77,265 Exhibit 40.2 Sample statement of partners’ capitals. 8 William H. Hoffman, Jr., ed., West’s Federal Taxation: Corporations, Partnerships, Estates and Trusts (West, St. Paul, MN, 1978). titled. He has no voice in management, nor may he ob tain an accounting except in case of dissolution of the business; ordinarily he can make no withdrawal of capital without the consent of the partners. To illustrate some of the possibilities in connection with purchase of an interest, assume that the firm of Hirt, Thompson, and Pitts negotiates with Davis for the purchase of a capital interest. Data are as follows: Capital Accounts Income Ratio Hirt $20,000 50% Thompson 12,000 40% Pitts 8,000 10% $40,000 100% (i) Purchase at Book Value. If Davis purchases a one-fourth interest for $10,000, it is clear that he is paying exactly book value, and the entry would be: Hirt, capital $5,000 Thompson, capital $3,000 Pitts, capital $2,000 Davis, capital $10,000 The cash payment would be divided in the same manner (i.e., Hirt $5,000, Thompson $3,000, and Pitts $2,000) and would pass directly from Davis to them without going through the firm’s cash account. (ii) Purchase at More than Book Value. Assume now that Davis agrees to pay $12,000 for a one-fourth interest; this is more than book value. In general, two solutions are possible. Bonus Method. Under this method, the extra $2,000 paid by Davis is considered to be a bonus to Hirt, Thompson, and Pitts and is shared by them in the income ratio. The entry is: Hirt, capital $5,000 Thompson, capital $3,000 Pitts, capital $2,000 Davis, capital $10,000 The cash payment of $12,000 is divided as follows: Hirt Thompson Pitts Total Capital transferred $5,000 $3,000 $2,000 $10,000 Premium—in income ratio $1,000 $0,800 $0,200 $02,000 Cash received $6,000 $3,800 $2,200 $12,000 Goodwill Method. That Davis is willing to pay $12,000 for a one-fourth interest indicates that the business is worth $48,000. Existing assets are therefore undervalued by $8,000. Under the goodwill or revaluation of assets method, if specific assets can be revalued, this should be done. If not, or if the agreed revaluation is less than $8,000, the difference may be assumed to be goodwill. Dividing the gain in the income ratio results in this entry: Sundry assets and/or goodwill $8,000 Hirt, capital $4,000 Thompson, capital $3,200 Pitts, capital $4,800 40.3 ACCOUNTING FOR CHANGES IN FIRM MEMBERSHIP 40 • 13 The entry to record Davis’s admission would then be: Hirt, capital $6,000 Thompson, capital $3,800 Pitts, capital $2,200 Davis, capital $12,000 The cash payment will be received in amounts equal to the transfer from the capital accounts. (iii) Purchase at Less than Book Value. Assume next that Davis agrees to pay only $9,000 for a one-fourth interest—that is, less than book value. Again two solutions are possible. Bonus Method. Under this method, the same transfers are made from the three partners to Davis’s capital account as if he had paid book value, but the difference of $1,000 is apportioned to determine the cash settlement, as follows: Hirt Thompson Pitts Total Capital transferred $5,000 $3,000 $2,000 $10,000 Loss—in income ratio $0,500 $0,400 $0,100 $01,000 Cash received $4,500 $2,600 $1,900 $09,000 Revaluation of Assets Method. This approach reasons that a price of $9,000 for a one-fourth in- terest indicates that the business is worth $36,000 and that assets should be revalued downward by $4,000. Where a portion of the write-down can be identified with specific tangible assets, the ap- propriate accounts should be adjusted. Otherwise, existing goodwill should be included in the write-down. (1) Hirt, capital $2,000 Thompson, capital $1,600 Pitts, capital $2,400 Sundry, assets and/or goodwill $4,000 (2) Hirt, capital $4,500 Thompson, capital $2,600 Pitts, capital $1,900 Davis, capital $9,000 (c) NEW PARTNER’S INVESTMENT TO ACQUIRE AN INTEREST. The admission of a new partner when he makes an investment in the firm to acquire a capital interest is illustrated by the fol- lowing cases. Assume that the capital account balances of the partnership of Andrews and Bell prior to the ad- mission of Cohen are: Capital Accounts Income Ratio Andrews $18,000 60% Bell $12,000 040% $30,000 100% 40 • 14 PARTNERSHIPS AND JOINT VENTURES (i) Investment at Book Value. If Cohen invests $10,000 in the firm for a one-fourth interest, the entry is: Cash (or other assets) $10,000 Cohen, capital $10,000 (ii) Investment at More than Book Value. If Cohen is willing to invest $14,000 for a one-fourth interest, the total capital will be $44,000. Bonus Method. Under this method, Cohen’s share is one-fourth or $11,000, and the $3,000 pre- mium is treated as a bonus to the old partners by the entry: Cash (or other assets) $14,000 Andrews, capital $01,800 Bell, capital $01,200 Cohen, capital $11,000 Goodwill Method. If Cohen invests $14,000 for a one-fourth interest, it would seem that the total worth of the firm should be $56,000. Since total capital is $44,000, under the goodwill or revaluation of assets method, there is justification in assuming that existing assets are undervalued to the extent of $12,000. Circumstances may indicate that the $12,000 undervaluation is in the form of goodwill. If it is to be recognized, the entries are as follows: (1) Goodwill $12,000 Andrews, capital $07,200 Bell, capital $04,800 (2) Cash $14,000 Cohen, capital $14,000 If the understatement of the capital of the old partners was attributable to excessive depreciation allowances, land appreciation, an increase in inventory value, or some combination of such fac- tors, an appropriate adjustment of the asset or assets involved would be substituted for the charge to “goodwill.” (iii) Investment at Less than Book Value Bonus Method. If Cohen invests $8,000 for a one-fourth interest, it may indicate the willingness of the old partners to give Cohen a bonus to enter the firm. Since the total capital is now $38,000, a one-fourth interest is $9,500 and the entry is: Cash $8,000 Andrews, capital $8,900 Bell, capital $8,600 Cohen, capital $9,500 Revaluation of Assets Method. Under this method, the investment by Cohen of only $8,000 for a one-fourth interest may be taken to mean that the existing net assets are worth only $24,000. The overvaluation of $6,000 could be corrected by crediting the overvalued assets and charging Andrews and Bell in the income ratio. 40.3 ACCOUNTING FOR CHANGES IN FIRM MEMBERSHIP 40 • 15 (1) Andrews, capital $3,600 Bell, capital $2,400 Sundry assets $6,000 (2) Cash $8,000 Cohen, capital $8,000 Goodwill Method. A third method sometimes offered to handle this situation is the goodwill method, which assumes that the new partner contributes goodwill (of $2,000 in this case) in addition to the cash and is credited for the amount of his interest at book value ($10,000 in this case). This seems illogical, however, since it contradicts the original fact that Cohen’s investment was to be $8,000. (d) SETTLING WITH WITHDRAWING PARTNER THROUGH OUTSIDE FUNDS. The with- drawal of a partner where settlement is effected by payments made from personal funds of the re- maining partners directly to the retiring partner is illustrated by the firm of Adams, Bates, & Caldwell: Capital Balances Income Ratio Adams $30,000 50% Bates 24,000 30% Caldwell $16,000 020% $70,000 100% (i) Sale at Book Value. If Caldwell retires, selling his interest at book value to the other partners in their income ratio and receiving payment from outside funds of Adams and Bates, the entry is: Caldwell, capital $16,000 Adams, capital $10,000 Bates, capital $16,000 The total payment to Caldwell is $16,000, and payments by Adams and Bates are $10,000 and $6,000, respectively. (ii) Sale at More than Book Value. If payment to Caldwell exceeds book value, either the bonus or the goodwill method may be used. Bonus Method. If total payment to Caldwell is $18,000, the premium of $2,000 may be treated as a bonus to Caldwell. The entry to record the withdrawal of Caldwell is the same as above, and pay- ment would be as follows: Adams Bates Total Capital per books $10,000 $6,000 $16,000 Premium paid $01,250 $0,750 $02,000 Cash required $11,250 $6,750 $18,000 Goodwill Method. In the following situation, Adams and Bates are willing to pay a total of $2,000 more than book value for Caldwell’s interest. Since the latter receives 20% of the profits, this implies that assets are undervalued by $10,000. Under the goodwill or revaluation of assets method, all or part of this amount may be goodwill. The entries to record this situation are: 40 • 16 PARTNERSHIPS AND JOINT VENTURES (1) Goodwill or sundry assets $10,000 Adams, capital $05,000 Bates, capital $03,000 Caldwell, capital $02,000 (2) Caldwell, capital $18,000 Adams, capital $11,250 Bates, capital $06,750 (iii) Sale at Less than Book Value. If Caldwell should agree to accept $15,000 for his interest, this is $1,000 less than book value. Bonus Method. The $1,000 may be considered to be a bonus to Adams and Bates. The entry would be the same as in the first example, but the cash payments would be calculated as follows: Adams Bates Total Capital, per books $10,000 $6,000 $16,000 Less discount allowed $00,625 $0,375 $01,000 Cash required $09,375 $5,625 $15,000 Revaluation of Assets Method. In this example, it can be argued under the revaluation of assets approach that the discount of $1,000 for a 20% share in firm profits implies an overstatement of book values of assets by $5,000. If this correction is to be made, the entries to adjust the books and record the subsequent withdrawal of Caldwell are: (1) Adams, capital $12,500 Bates, capital $11,500 Caldwell, capital $11,000 Sundry assets $5,000 (2) Caldwell, capital $15,000 Adams, capital $9,375 Bates, capital $5,625 In preceding examples, the so-called bonus method and revaluation of assets method have been presented as alternatives. Although each method results in different capital account balances in the new firm that comes into being, it should be observed that the partners in the new firm are treated rel- atively the same under either method. This is subject to the basic qualification that the old partners who remain in the new firm must continue to share profits and losses as between themselves in the same ratio as before. (e) SETTLEMENT THROUGH FIRM FUNDS. The withdrawal of a partner where settlement is to be made from funds of the business is illustrated by the firm of Arnold, Brown & Cline. Capital Balances Income Ratio Arnold $040,000 30% Brown 50,000 30% Cline $060,000 40% $150,000 100% 40.3 ACCOUNTING FOR CHANGES IN FIRM MEMBERSHIP 40 • 17 (i) Premium Paid to Retiring Partner. Payment is to be made to Cline from the assets of the part- nership. Payment is $64,000, to be made one-half in cash and the balance in notes payable. Under one treatment, the premium of $4,000 is viewed as chargeable to the remaining partners in their in- come ratio. The entry is: Arnold, capital $02,000 Brown, capital $02,000 Cline, capital $60,000 Cash $32,000 Notes payable $32,000 A second method treats the $4,000 premium as payment for Cline’s share of the unrecognized good- will of the firm. The following entry would be made: Goodwill $04,000 Cline, capital 060,000 Cash $32,000 Notes payable $32,000 A third possibility for recording the retirement of Cline is to recognize a total goodwill or asset revaluation implied by the premium paid for the retiring partner’s share. Since a $4,000 pre- mium was paid for a 40% share, total implied goodwill or asset revaluation is $10,000, and the en- tries are: (1) Goodwill or sundry assets $10,000 Arnold, capital $33,000 Brown, capital $33,000 Cline, capital $34,000 (2) Cline, capital $64,000 Cash $32,000 Notes payable $32,000 Many accountants are inclined to approve of the first treatment on the grounds that it is “conservative.” Meigs, Johnson, and Keller state that it is “consistent with the current trend toward viewing a partnership as a continuing business entity, with asset valuations and ac- counting policies remaining undisturbed by the retirement of a partner.” 9 The second treat- ment is supported by reference to the rule that it is proper to set up goodwill only when it has been purchased. The third interpretation relies on the idea that it is inconsistent to recognize the existence of an intangible asset and then to record it at only a fraction of the proper amount. The accountant may distinguish between a payment for goodwill and one that represents a partner’s share of the increase in value of one or more of the firm’s assets. In the latter case, it is generally not reasonable to record only the increase attaching to the retiring partner’s equity. Suppose, for example, that an inventory of merchandise has a market value on the date of set- tlement substantially above book value. Clearly, the most appropriate treatment here is that under which the inventory is adjusted to market value—the value at which it is in effect acquired by the new firm; to add to book value only the withdrawing partner’s share of the 40 • 18 PARTNERSHIPS AND JOINT VENTURES 9 Walter B. Meigs, Charles E. Johnson, and Thomas F. Keller, Advanced Accounting (McGraw-Hill, New York, 1966). [...]... and accurate records of all estate receipts and disbursements This is necessary for tax returns and for accountings to courts and beneficiaries 7 Determine whether assets coming under the control of representatives are sufficient to meet both claims against the estate and legacies allowed by will and/ or state law 8 Review cash requirements to pay legacies, taxes, debts, and administration expenses, and. .. consolidation policy that would be based on both control and benefits, and it has begun but not completed its reconsideration of the level and types of benefit required for consolidation The FASB has also decided to consider expanding the scope of the proposed Statement to specify the accounting for all rights and obligations stemming from a relationship with a special- purpose or limited-purpose entity that is... property, sometimes called intestate succession or laws of descent and distribution, is strictly defined by state statute and is based on degree of relationship to the deceased New York State, for example, provides that if a decedent dies without a will and leaves a wife and two children, the wife receives $50,000 and one-half of the residuary estate and the children share the other one-half Under the same circumstances,... for the offered units with the Securities and Exchange Commission (SEC) and undertake to file periodic reports with the SEC Large limited partnerships that engage in ventures such as oil and gas exploration and real estate development and issue units registered with the SEC are called master limited partnerships The SEC has provided guidance for such registration and reporting in Industry Guide 5: Preparation... present and potential investors on past and prospective changes in the economic resources and obligations of the entity, its critics point out that it is based on the concept of control over pieces of the joint venture even though such control does not actually exist Similarly, the method combines net assets in the balance sheet and operations in the income statement that the investor owns and controls... consolidation policy and procedures project resulted in the issuance of FASB Statement No 94, “Consolidation of All Majority-Owned Subsidiaries,” in October 1987 A second phase resulted in a Discussion Memorandum, “Consolidation Policy and Procedures,” in September 1991; a Preliminary Views, Consolidation Policy, in August 1994; and an Exposure Draft, “Consolidated Financial Statements: Policy and Procedures,”... demonstrates the realization of assets, payment of creditors, and final single cash distribution to the partners Losses are first allocated to the partners in the income ratio, followed by cash payment to creditors and then to partners Rogers, Stevens, and Troy are partners with capital balances of $20,000, $15,000, and $10,000, respectively Profits and losses are shared equally On a particular date they find... Financial Handbook, 4th ed Ronald Press, New York, 1968 Defliese, Philip L., Johnson, Kenneth P., and Macleod, Roderick K., Montgomery’s Auditing, 9th ed Ronald Press, New York, 1975 Dixon, Robert L., Hepworth, Samuel R., and Paton, William A., Jr., Essentials of Accounting Macmillan, New York, 1966 Financial Accounting Standards Board, “Related Party Disclosures,” Statement of Financial Accounting Standards... Estates and Trusts West, St Paul, MN, 1978 Internal Revenue Service & Internal Revenue Code of 1954, Section 761, Subchapter K Meigs, Walter B., Johnson, Charles E., and Keller, Thomas F., Advanced Accounting McGraw-Hill, New York, 1966 Moonitz, Maurice, and Jordan, Louis H., Accounting—An Analysis of Its Problems, 2 vols., rev ed Holt, Rinehart and Winston, New York, 1963 CHAPTER 41 ESTATES AND TRUSTS... administer the estate and select a guardian (a protector of the body and property of his children, if any) A will can be very simple or very complex depending on the extent of the testator’s property and desires To be valid, the will must be properly executed according to state law Such state laws normally require the maker to declare that the document is his last will and testament and to sign it in the . interest in the profits and losses of the firm and, upon dissolution, the interest to which the original partner would have been en- 40 • 12 PARTNERSHIPS AND JOINT VENTURES AHERN AND CIECKA, PARTNERSHIP Statement. the partnership of Andrews and Bell prior to the ad- mission of Cohen are: Capital Accounts Income Ratio Andrews $18,000 60% Bell $12, 000 040% $30,000 100% 40 • 14 PARTNERSHIPS AND JOINT VENTURES (i). the $27,000 credit balance of the expense and revenue account represents both the bonus and the final net income. Hence the $27,000 is 120 % of the net income, and the net income is 100%, or $22,500. Under