-------Original Message-------
From: PS
Date: 03/21/09 20:17:41
To: LJ
Cc: MJ
Subject: 1065 Sched L M1 and M2
Peter had asked about the Depletable Assets field and Partner's Capital
Accounts fields. I found the little explanatory sheet of paper written by
the CPA where Peter works. It says this in very neat printing:
Partner Rollforward
Beg. Cap
+ Net Income
-Distributions
--------------
Ending Capital
= Depletable Assets
This piece of paper is the reason we put the same amt for
Depletable Assets (L10a and carried down to L10b(b))
as for Partner's Capital Accounts (L21)
When that IRS agent calls back, this might help us verify that what we did
is correct. We are assuming that they are referring to cost depletion when
they ask for itemized depletion in L10B (a). Since we do percentage
depletion, we put nothing. That was our rationale. But it is only a guess.
-----------------
From: LJ
Subject: Re: How to Complete 1065 Sched L M1 and M2
Date: March 27, 2009 5:33:49 PM CDT
To: PS
Cc: MJ
I received an answer from the IRS saying that they couldn't assist us on this highly technical and complex issue that would involve lengthy research. It was basically a form letter saying we were on our own or to consult a tax professional.
So, I guess we should go with the way you originally filled out the form and maybe add a note explaining our situation to help the IRS know what we're doing and why.
----------------------------
Re: 1065 Sched L M1 and M2
We need to verify that assets have to equal liabilities+capital, in other words, that we are not stating our partnership value twice, once as depletable assets and another as partner's capital accounts. See attached two possible versions of these scheds, one settings assets = liabilities+capital (no zeros in Sched L), the other assuming that schedule L would interpret partner's capital accts to be IN ADDITION TO depletable assets (which in not true at all and therefore we have zeros). A third version (not printed/attached) would be if we were supposed to list the value of our partnership only as partners' capital accts (in which case the depletable assets would be redundant and should be 0).
Peter, could you advise us, or ask the nice CPA lady at work to confirm which is right? I think people who are used to looking at corporate returns know the answer to this assets = liabilities+capital question, regardless of whether oil and gas is involved.
The value we used for depletable assets came from our originating partnership document where the working interest was conveyed into the partnership and a value of the working interest was stated at that time (2003).
Thanks,
PS
PS. I think the ANSWER MAY BE CONTAINED IN THIS BLOG, translated into English from some Scandinavian language (I JUST GOOGLED "DO ASSETS EQUAL CAPITAL + LIABILITIES):
http://thatdudeyouknow.wordpress.com/2009/01/22/%C2%A7284-the-beautiful-art-of-accountancy/
IN FACT, WE MAY HAVE STUMBLED UPON THE SECRET OF THE UNIVERSE IN A WORLD OF DUALISM. I'm going to print this out and study it. Here's an excerpt:
Here are the basics. The balance sheet is the basic report that shows in the end of the year exactly what the company looks like. It’s divided in three. The first one is assets. All the stuff that the company owns. From the value of computer and buildings, to the value of the the inventory to the money on the bank. The second part is liabilities. How much you owe others. Loans, unpaid invoices, etc. The last one is Capital and is the actual difference between assets and liabilities. The capital of a company is usually a good indication on how rich it is. A company can own millions of dollars but also have million dollar debts. Then they’re not really that rich. But even if the capital is disgustingly high, you also need to take a look at the type of assets. If a company has a capital of 3.5 million, but 3 million of its assets are buildings and computers that they can’t do anything with except letting them stand where they stand, then they don’t have that much real money. But they own a lot of crap.
So the accountancy equation is that capital plus liabilities equals assets. In order to write this correctly, you use the “double entry system” (enter dramatic music here) bam-bam-bam. Every thing you do is written in two places. If a company buys a computer then it’s a plus on stuff (”fixed assets”) and a minus on money assets. Liabilities and capital didn’t change, a piece of assets only changed form and became another piece of asset. But if you pay salaries, that’s an expense. So that’s a minus on assets and a minus on capital. If you buy a bunch of furniture but haven’t paid yet, it’s a plus on furniture assets, and a plus on liabilities. When you’ve paid the dept, it’s a minus on liabilities and a minus on money assets. When you get an electricity bill but haven’t paid it, it’s a minus on capital and a plus on liabilities. When you pay the bill it’s a minus on liabilities and a minus on assets. Whatever you do, capital plus liabilities always equal assets.
