Accounting theory and practice, Volume 2 (of 3)

by Roy B. Kester

1. A uniform accounting system for all the companies to be merged, in order to have the same basis in arriving at the results.

2. The reserves for depreciation should be based on an analogous system of calculation.

3. Costs should be determined in the same way if the companies carry on the same industry; if the industries are not similar the cost should be reduced to the same basis.

4. The apportionment of labor, factory expense, and factory overhead should be uniform.

5. Only real items of cost should be included under the head of cost of plant and all income charges should be eliminated so as to give a basis for comparing manufacturing items.

6. The same methods of inventory-taking, both of working assets and fixed capital, should be used. Proper valuation of accounts receivable should be made. The accounts payable should be properly shown.

7. The amount of orders on hand should be considered. The past year may have been poor and the books may not reflect the true state of affairs.

Valuation of Partnership

Where, as frequently happens, a partnership is a party to the merger, it is necessary to consider the method of handling certain items in the partnership accounting which differs from their handling under the corporate form, so that the valuation of the assets and earnings of all the properties can be placed on an equitable basis. Such items are partners’ salaries and drawings, and the interest on capital and drawings for the purpose of adjusting the various partners’ interests. In partnership accounting the proper treatment of partners’ salaries, drawings, and interest on capital and drawings requires that these appropriations of profits be shown in the profit and loss summary; i.e., the figure of net profits for a partnership is determined before taking into consideration the items mentioned. However, one occasionally finds partners’ salaries and adjustments on account of interest handled as expenses of the business. To place the earning capacity of the partnership on an equitable basis for comparison with the earnings of a corporation, a reasonable figure for the salaries of the partners as managers of the business must be agreed upon and treated as an expense chargeable to operations before the determination of net profits. Partners’ drawings and interest adjustments on account of capital and drawings should not be taken into account in the determination of earning capacity. In determining the amounts of partners’ salaries, that which would be appropriate for similar capacities in a corporation should be allowed as deductions from earnings. All the items mentioned above in connection with placing the properties of the several corporations on an equitable basis for valuation apply with equal force to the properties of any partnerships which may become parties to the merger.

Earning Capacity