JOINT ARRANGEMENT

LECTURE NOTES

BASIC CONCEPTS
JOINT ARRANGEMENTS - an arrangement of which two or more parties have joint
control.
JOINT CONTROL - the contractually agreed sharing of control of an
arrangement which exists only when decisions about the
relevant activities require UNANIMOUS CONSENT of the
parties sharing control.
NOTE:
(1) In contrast with significant influence and control, joint control is obtained by an investor through
contractual agreement with fellow investors. No sole joint operator or venture obtains leverage over
another joint operator or joint venture in respect of voting rights over financial and operating
decisions.
(2) Joint control exists when all of the parties to the contractual arrangement act collectively (or
together) in directing the activities that significantly affect the returns of the arrangement.

TYPES OF JOINT ARRANGEMENT

The following are the types of joint arrangements under PFRS 11:

(a) JOINT OPERATION – is a joint arrangement whereby the parties that have joint control of the arrangement
have rights to the assets and obligations for the liabilities, relating to the arrangement. Those parties are
called JOINT OPERATORS.

(b) JOINT VENTURE - is a joint arrangement whereby the parties that have joint control of the arrangement
have rights to the net assets of the arrangement. Those parties are called JOINT VENTURERS.

An entity applies judgment when determining the type of joint arrangement in which it is involved. Such judgment
shall be made as follows:

(1) Determine the type of joint arrangement by considering the entity’s rights and obligations arising from the
arrangement.

(2) Assess the rights and obligations by considering the following:

(a) Structure and legal form of the arrangement,

NOTE: A joint arrangement that is NOT structured through a SEPARATE VEHICLE is a JOINT
OPERATION. A joint arrangement in which assets and liabilities relating to the arrangement are held
in a SEPARATE VEHICLE can EITHER be JOINT VENTURE or JOINT OPERATION.A separate vehicle is a
separately identifiable financial structure, including separate legal entities or entities recognized by
statute, regardless of whether those entities have a legal personality.

(b) Terms of the contractual agreement,

(c) Other facts and circumstances

ACCOUNTING FOR JOINT ARRANGEMENTS

SUMMARY OF ACCOUNTING TREATMENTS (FULL PFRS)

NATURE OF APPLICABLE
ACCOUNTING
RELATIONSHIP WITH TYPE OF INVESTMENT REPORTING
TREATMENT
INVESTEE STANDARDS
Recognize own assets,
liabilities, revenues and
PFRS 11 AND OTHER
JOINT CONTROL JOINT OPERATION expenses plus share in
RELEVANT PFRSs
assets, liabilities,
revenues and expenses
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 in joint operation

JOINT VENTURE PFRS 11 PAS 28 Equity Method

ACCOUNTING FOR JOINT OPERATION (NO SEPARATE RECORDS ARE MAINTAINED)

No separate records are maintained for a joint operation usually if it is short-lived. In order to assess the
performance of the joint operation, management accounts are prepared.

Management accounts are accounts used for internal reporting purposes only. These are closed or eliminated when
general purpose financial statements are prepared. A management account “JOINT OPERATION” is used to assess
the financial performance of the entity. The following is the T-account of the joint operation account.

Joint Operation
Merchandise Contributions xx Merchandise Withdrawals xx
Purchases and Freight-in xx Purchase returns, discounts and allowances xx
Sales returns, discounts and allowances xx Sales and other income items xx
Expenses xx Unsold merchandise xx
Net loss xx Net income xx

NOTE: The T-account shown above is similar to an income summary account.

Each joint operator shall set-up a joint operation account and personal accounts (i.e., receivable or payable) of
other joint operators in his books.

Any cash received or paid by the manager of a joint operation is recorded by the manager in cash account which
may be described as “joint operation – cash (JO-Cash)” account.

ACCOUNTING FOR JOINT OPERATION (SEPARATE RECORDS ARE MAINTAINED)

Joint operators may want to set-up separate records for the joint operation. The separate records will be kept by
one of the joint operators – normally the appointed manager.

Each joint operator may set-up an “Interest in Joint Operation” account which will be used by each joint operator in
recording his own investments withdrawals and share in profits or losses of the joint operation.

Interest in Joint Operation

Contributions and Investments xx Sales and other income received xx
Cost and expenses paid for the joint operation xx Withdrawals of contributions or investments xx
Share in the profit of joint operation xx Share in loss of the joint operation xx

NOTE: A DEBIT BALANCE in the T-account means cash RECEIPT (receivable) while a CREDIT BALANCE means cash
PAYMENT (payable) on cash settlement of the joint operation.

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ACCOUNTING FOR JOINT VENTURES

An entity shall apply PFRS 11 first to determine the type of arrangement in which it is involved. If the entity
determines that it has an interest in a joint venture, the entity shall recognize its interest as an investment and
account for it using EQUITY METHOD in accordance with PAS 28.

Under equity method, the investment is initially recognized at cost and adjusted thereafter for the post acquisition
change in the investor’s share of net assets of the investee.
Investment in Joint Venture
Beginning Balance xx Share in Dividends xx
Investment Income (P/L)* xx Share in Investee’s OCL (OCL) xx
Share in Investee’s OCI (OCI) xx Impairment Loss (P/L) xx

End. Balance xx

NOTE: Investment income (share in profit or loss) is recognized only to the extent of unrelated investor’s interests
in the joint venture. Thus if a transaction is:
(a) Downstream (from venturer to joint venture) – eliminate entire unrealized profit
(b) Upstream (from joint venture to venture) – eliminate investor’s share in unrealized profit.

Impairment losses

After application of the equity method, including recognizing the associate’s losses, the investor applies the
requirements of PAS 39 to determine whether it is necessary to recognize any additional impairment loss with
respect to the investor’s net investment in the associate.

The investor also applies the requirement of PAS 39 to determine whether any additional impairment loss is
recognized with respect to the investor’s interest in the associate that does not constitute part of the net
investment and the amount of that impairment loss.

Because goodwill included in the carrying amount of an investment in an associate is not separately recognized, it
is not tested for impairment separately by applying the requirements for impairment testing goodwill in PAS 39
Impairment of assets. Instead, the entire carrying amount of the investment in PAS 28 tested under PAS 36 for
impairment, by comparing its recoverable amount (higher of value in use and fair value less cost to sell) with its
carrying amount, whenever application of the requirements in PAS 39 indicates that the investment may be
impaired. In determining the value in use of the investment, an entity estimates:
a. Its share of the present value of the estimated future cash flows expected to be generated by the associate,
including the cash flows from the operations of the associate and the proceeds on the ultimate disposal of the
investment; or
b. The present value of the estimated future cash flows expected to arise from dividends to be received from the
investment and from its ultimate disposal.

Under appropriate assumption, both methods give the same result. The recoverable amount of an investment in
an associate is assessed for each associate, unless the associate does not generate cash inflows from continuing
use that are largely independent of those from other assets of the entity.

Associate Having Heavy Losses

If an investor’s share of losses of an associate equals or exceeds its interest in the associate, the investor
discontinues recognizing its share of further losses.

Share in losses of associate is recognized up to the amount of the “interest in the associate.” The interest in an
associate is the carrying amount of the investment in the associate under the equity method together with any
long-term interest that, in substance, form part of the investor’s net investment in the associate. Total interest
includes the following:
1. Carrying amount of investment in associate
2. Investment in preference shares and
3. Unsecured long-term receivables or loans

Total interest does not include the following:

1. Trade receivables
2. Trade payables or
3. Any long-term receivables for which adequate collateral exists, such as secured loans.
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 If the associate subsequently reports profits, the investor resumes recognizing its share of those profits only after
its share of the profits equals the share of losses not recognized.

Losses recognized under the equity method in excess of the investor’s investment in ordinary shares are applied to
the other components of the investor’s interest in an associate in the reverse order of their seniority (i.e.
priority in liquidation)
The order of priority for liquidation is as follows:
1. External Creditors
2. Internal Creditors
3. Owners

So the reverse order of seniority would be as follows:

1. Owners
2. Internal Creditors
3. External Creditors

Therefore, the share in the loss of the associate shall be recorded as follows:
1. First, charge to balance of investment in associate
2. Next, charge to balance of investment in preference shares (owners) and
3. Lastly, charge to unsecured long-term receivables and loans.

After the investor’s interest in the associate is reduced to zero, additional losses are recognized only for the
following: (a) legal or constructive obligations; or (b) payments made on behalf of the associate. If the
associate subsequently reports profits, the investors resumes recognizing its share of those profits only after its
share of the profits equals the share of losses not recognized.

Full vs. SMEs vs. SEs

Full PFRS PFRS for SMEs PFRS for SEs

Accounting for Joint Accounted for using Accounting policy under Accounting policy under Section
Ventures equity model under Section 15 10
PAS 28 1. Cost model 1. Cost model
2. Equity model 2. Equity model
3. Fair value model

IFRS for SMEs provide three (3) methods of accounting for its interest in the joint venture: (a) the cost model, (b)
the fair value model, and (c) the equity model.

SUMMARY OF ACCOUNTING TREATMENTS (PFRS for SMEs)

Transactions Cost Model Fair Value Model Equity Model

Original Inv. In JV xx Inv. In JV xx Inv. In JV xx

Investment
Cash xx Cash xx Cash xx

Transaction Inv. In JV xx P/L xx Inv. In JV xx

Costs
Cash xx Cash xx Cash xx

Cash xx Cash xx Cash xx

Cash Dividends
P/L xx P/L xx Inv. In JV xx

Year-end FV Inv. In JV xx
Adjustment
P/L xx

Share in Net Inv. In JV xx

income P/L Xx

Share of P/L xx P/L Xx

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Impairment
Loss Inv. In JV xx Inv. In JV Xx

INVESTMENT IN JOINT ARRANGEMENT

Definition
Full PFRS PFRS for SMEs PFRS for SEs
A joint arrangement is a contractual Concept is generally the same as Same in full PFRS.
arrangement where at least two full PFRS, except that the term
parties agree to share control over “joint arrangement” does not exist
the activities of the arrangement. in PFRS for SMEs. Instead, “joint
Unanimous consent towards venture” is used to refer to a
decisions about relevant activities contractual arrangement whereby
between the parties sharing control two or more parties undertake an
is a requirement in order to meet economic activity that is subject to
the definition of joint control. joint control.

Types of joint arrangement

Full PFRS PFRS for SMEs PFRS for SEs
Joint arrangement can either be PFRS for SME distinguishes Same as full PFRS.
joint operations or joint ventures. between three types of joint
The classification is principle-based venture:
and depends on the parties’ rights • Jointly controlled entities, in
and obligations in relation to the which the arrangement is
arrangement. carried on through a separate
entity (company or
When the parties’ exposure to the partnership);
arrangements only extends to the • Jointly controlled operations in
net assets of the arrangement, the which each venturor uses its
arrangement is a joint venture. On own assets for a specific
the contrary, joint operators have project; and
direct rights to assets and direct • Jointly controlled assets, which
obligations for liabilities of the is a project carried on which
arrangement. assets that are jointly owned.

Accounting for joint ventures

Full PFRS PFRS for SMEs PFRS for SEs
A joint venturer shall recognize its Classification not available in PFRS A venture has the option to
interest in a joint venture as an for SMEs. account for its investments using
investment and shall account for one of the following:
that investment using the equity • Cost model, or
method in accordance with PAS 28 • Equity method
Investment in Associates and Joint
Ventures unless the entity is
exempted from applying the equity
method as specified in that
standard.

Accounting for joint operations

Full PFRS PFRS for SMEs PFRS for SEs
A joint operator accounts for rights Classification not available in PFRS Same as full PFRS.
and obligations by recognizing its for SMEs
own assets, liabilities, revenue, and
expenses, as well as its share of
assets, liabilities, revenue, expenses,
held/earned/incurred jointly from the
joint operation.

Accounting for jointly controlled entities

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 Full PFRS PFRS for SMEs PFRS for SEs
Classification not available in full A venturer shall account for all of Classification not available in PFRS
PFRS. its interests in jointly controlled for SEs.
entities using one of the following:
• The cost model;
• The equity method; or
• The fair value model

Accounting for jointly controlled operation

Full PFRS PFRS for SMEs PFRS for SEs
Classification not available in full Requirements are similar to jointly Classification not available in PFRS
PFRS. controlled entities without an for SEs.
incorporated structure. A venturer
recognizes in its financial
statements:
• The assets that it controls;
• The liabilities its incurs;
• The expenses it incurs; and
• Its share of income from the
sale of goods or services by
the joint venture.

Accounting for jointly controlled assets

Full PFRS PFRS for SMEs PFRS for SEs
Classification not available in full A venture accounts for its share of The entity shall adopt in its
PFRS. the jointly controlled assets, separate financial statements a
liabilities, income and expenses, policy of accounting for its
and any liabilities and expenses it investments in joint ventures:
has incurred. • At cost less impairment, or
• At equity method

Separate financial statements

Full PFRS PFRS for SMEs PFRS for SEs
Investments accounted for at cost When separate financial An entity has the option t elect
or using the equity method shall be statements of a parent are accounting policy for investments
accounted for in accordance with prepared, the entity choses to in subsidiaries in separate financial
PFRS 5 Non-current Assets Held for account for all of its investments in statements either:
Sale and Discontinued Operations subsidiaries, jointly controlled • At cost less impairment, or
when they are classified as held for entities and associates either: • At equity method
sale or for distribution (or included • At cost less impairment, or
in a disposal group that it classified • At fair value through profit or
as held for sale or for distribution). loss; or
The measurement of investment • Using the equity method.
accounted for in accordance with
PFRS 9 is not changed in such
circumstances.

Note: In a nutshell, full PFRS and PFRS for SEs are largely aligned, except that PFRS for SEs allows the use of
cost model in both consolidated and separate financial statements. Full PFRS was used as basis in developing
guidance for joint arrangements in PFRS for SEs and it is viewed to provide a more simplified classification of
arrangements with clear guidance.

PFRS for SMEs is generally based on PAS 31 (superseded by PFRS 11) except that it permits use of one of three
different models the equity method, the cost model and the fair value model, which was previously not
available under PAS 31.

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PRESENTATION AND DISCLOSURE

Investments accounted for under the equity method are presented as non-current assets in the statement of financial
position.

However, when such investments are classified as held for sale in accordance with PFRS 5, they are presented as
current assets.

Summary

JOINT ARRANGEMENT
Joint Arrangement (JArr) – under PFRS 11, is an arrangement of which two or more parties have joint control.
Moreover, it can either be: a) Joint Operation or b) Joint Venture.

Characteristics of JArr:
1. Parties are bound by contractual arrangement
2. This arrangement gives two or more of those parties joint control of the arrangement

Contractual arrangement – ensures that no single party is in position to control the activity unilaterally

Joint Control – is a contractually agreed sharing of control of an arrangement, which exist only when decision
about the relevant activities require the unanimous consent of the parties sharing control as per PFRS 11.

Regular Significant
Joint Control Control
Investment Influence
• No power to • Obtained by an The power to participate Power to govern the
participate nor investor through in the financial and financial and operating
control in the contractual operating policy decisions policies of an economic
financial or agreement with of an economic activity activity so as to obtain
operating activity other investors. but is not control or joint benefit from it.
of the entity. • The financial and control over these
operating policies.
decisions relating
to joint
arrangement
activities requires
consent of each
joint operators or
venturers.
Less than 20% Contractually agreed 20% to 50% 51% to 100%

PFRS 9 PFRS 11 or PAS 28 PAS 28 PFRS 3 and PFRS 10

Investment in FVPL or Joint Joint Investment in Associate Investment in Subsidiary

FVOCI Operation
Venture

At Fair Value A – Asset Ex – a) COST

Recognize Own A, L, R L – Liability Expense *not applicable when b) FAIR VALUE
and Ex plus share in The R – Revenue Equity entity prepares separate (PFRS 9)
A, L, R and Ex in the Joint Method financial statement. It Consolidation
Operation. Equity shall account for
Method* investments in associates,
joint venture and
subsidiaries at:

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 Joint Operations:

1. There is contractual arrangement and joint control

2. There is no separate vehicle – “always JO”
3. *If there is separate vehicle and the arrangement confers the party:
• “right to all economic benefits and assume all obligations” – JO

Joint Venture:

1. There is contractual arrangement and joint control

2. *If there is separate vehicle and the arrangement confers the party:
• “right to the Net Asset of the vehicle” – JV

How to determine the kind of Joint Arrangement

With Separate Vehicle

No Yes

Joint Operation
Each investors has
right to share in the
Net Asset of the Entity

No

Each investor has right to all

economic benefits and assume all
obligations
Yes

Joint Venture

JOINT OPERATION:

The Joint operator recognize its own Asset, Liability, Revenue and Expenses. In addition to which, the operator
shall also recognize its SHARE of any assets held and liabilities incurred by the joint operation as well as the
revenues and expenses of the latter.

Hence, the operator shall report the following:

Asset Own asset held Share of any assets held by joint
Operation

Liability Own liability incurred Share of any liability incurred jointly

Revenue Revenue earned independently Share of the revenue earned by

joint operation

Expenses Expenses incurred independently Share of any expenses incurred by

joint operation

Transaction between Operator and Joint Operation:

• Any gain or loss in the contribution of asset shall be recognized by the operator to the extent of the
interest of the other party. There is gain or loss because the contributor – operator carries the
assets contributed at BOOK VALUE while the other operators shall recognize the said asset at FAIR
VALUE. Hence, the difference in valuation of assets results to gain or loss.

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Accounting Treatment:
1. By unincorporated Joint Operation
2. Partnership in nature

Format in determining the income or (loss) of Joint Operation:

Joint Operation
-Merchandise Contribution XX XX Merchandise Withdrawal
-Purchase and Freight In XX XX Purchase Returns, Discount and allowances
-Sales Returns, discount and allowances XX XX Sales and other items of income
-Expenses (paid by operator of from JO – XX XX
Unsold Merchandise (Ending Inventory
cash
Debit balance – (Loss) XXX XXX Profit – Credit balance

Format in determining cash receipt or cash payment:

Investment in Joint Operation
Contribution/Investment XX XX Sales and other income collected
Cost/Expense paid for JO XX XX Withdrawals of Contribution/UM
Share in Profit JO XX XX Share in Loss JO
(Receivable) Receipt Payment (Payable)

Capital of Operator
Receivable from Operator for collections on XX XX
Contribution/Investment
sale
Withdrawals of Contribution/UM XX XX Cost/Expense paid for JO
Share in Loss of JO XX XX Share in Profit of JO
Debit Credit
(Payable) (Receipt)
Balance Balance

Joint Venture:

• Equity Method shall be applied in accounting for the “Investment in Joint Venture Account”
• Percentage share in the net income (loss) of the Joint Venture
• In JoVA will increase:
o when there is share in profit
• In JOVA will decrease:
o when there is share in losses and
o when the venturer received dividend from the joint venture
• Downstream unrealized profit or gain on sale – “Full recognition”
• Upstream unrealized profit or gain on sale – “percentage recognition - % share only”

Comparing FULL PFRS and PFRS for SMEs

Criteria FULL PFRS PFRS for SMEs
1. As to form to its Form: 2 Forms of Joint Arrangement: 3 Forms of Joint Venture:
Joint Arrangement (FULL) A. Joint Operation
Joint Venture (SME) B. Joint Ventures I. J.Co [Jointly Controlled
Operation]
As discussed above under PFRS II. J.CA [Jointly Controlled
11 paragraph 14, 15, 16 Asset]
III. J.CE [Jointly Controlled
Entities]

Note: the J.CE has similar

treatment with joint venture
under PFRS 11.

In J.CO, the venture uses its

own asset and incurs own
liabilities and expenses

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 Lastly, in J.CA, the venture has
joint ownership of the assets
contributed or acquired for joint
venture purposes
2. As to the Accounting Under paragraph 24 of PFRS 11, 3 methods
policy: Joint Venture shall be accounted
Joint Venture (Full) for using EQUITY METHOD in 1. Cost Model:
Jointly Controlled Entities accordance with IAS 28 [Cost less Impairment]
(SME)
2. Equity Method

3. Fair Value Method:

[Change in Fair Value
shall be recognized in
Profit or Loss (PL)]

3 Methods under JC entity:

1. Cost less I/L With Impairment Dividend Income = Transaction Cost Share in Profit = no
loss (I/L) no effect in treated as Direct effect in
investment Attributable Cost investment

2. FV [Change Without Dividend Income = Transaction Cost Share in Profit = no

in FV = PL] Impairment loss no effect in treated as Expense effect in
(I/L) investment investment

3. Equity With Impairment Dividend income Transaction Cost Share in profit

loss (I/L) reduces the treated as Direct increases the
investment Attributable Cost investment

THEORY AND COMPUTATIONAL

Identify a joint arrangement:

1. Which of the following is a peculiar characteristic of a joint arrangement?

A. Significant influence C. Joint control
B. Control D. Joint venture

2. Read Co. and Learn Co. are national distributors of textbooks. Read and Write enters into a contract to
acquire a warehouse in a particular region. Each party will use the warehouse to store its own inventories.
The parties agree to share in the costs of acquiring and maintaining the warehouse. The arrangement
between Read and Learn is most likely a
A. Joint operation C. Joint venture
B. Jointly controlled asset D. None of these

3. Read Co. and Learn Co. are publishers of textbooks. Read and Learn enters into a contract to put up a
bookstore which shall be named Knowledge Bookstore. Knowledge will have its own assets, incur its own
liabilities, and earn and incur its own revenues and expenses. Read and Learn will each have a 50%
interest in the net assets and profits of Knowledge. The arrangement between Read and Learn is most
likely a
A. Joint operation C. Joint venture
B. Jointly controlled assets D. None of these

4. If operating system. Each joint operator retains control over the assets contributed to the joint operation
and share equally in the profits and losses of the joint operation. During the year Tech Co. earns a
revenue of P1, 000,000 from its own operations. Sales of Super OS amount to P400, 000. How much total
revenue shall be reported in Tech Co.’s statement of profit or loss for the year?
A. P1,000,000 C. P1,400,000
B. P1,200,000 D. Either A or B

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 5. Tech Co. and Robotics Co. are joint venturers of Mecha Co., a producer of high tech machinery. Tech and
Robotics, each have a 50% interest in the net assets of Mecha CO. during the year, Tech Co. earns
revenue of P1, 000, 000 from its own operations while Mecha Co. reports revenue of P400, 000. How
much total revenue shall be reported in Tech Co.’s statement of profit and loss for the year?
A. P1,000,000 C. P1,400,000
B. P1,200,000 D. Either A or B

6. If an entity’s statement of financial position shows an “investment” account for the interest in a joint
arrangement, a user of the entity’s financial statement would most like find out in the notes that the
nature of the joint arrangement is a (an)
A. Joint operation C. Investment in associate
B. Joint venture D. Either of these

7. In its financial statements that are not considered separate financial statements, how should a joint
venture account for its interest in a joint arrangement?
A. The joint venture recognizes its share in the assets, liabilities, income and expenses in the joint
venture by adding those shares, line by line, to similar accounts.
B. The venture uses the equity method to recognize its share in the revenues and expenses of the joint
venture.
C. The venturer uses the equity method to recognize its share in the changes in the net assets of the
joint venture through one-line consolidation.
D. The venture accounts for the investments at cost, at fair value on using the equity method.

Accounting for joint operations

8. Cow and Chicken are joint operations sharing profits and losses equally. The parties appoint Chicken as
the custodian of the joint operations assets. The joint operation’s transactions during the year are as
follows:
a. Cow contributes inventory costing P300.
b. Chicken contributes cash of P300 to the joint operation.
c. Chicken purchases additional inventory of P300 using the joint operation’s cash.
d. Chicken sells inventory costing P350 for P800 cash.
e. Chicken pays expenses of P200 using the joint operation’s funds.
f. Unsold inventory at year-end amounts to P50.

Requirements:

Case #1: No separate books

a. Prepare journal entries for transactions (a) to (e) above assuming no separate books are maintained for
the joint operation (the parties use the ‘joint operation’ account to record the joint operation’s
transactions).
b. Compute for the profit or loss of the joint operation using the ‘joint operation’ T-account.
c. If the joint operation is terminated at year-end, how much cash will be distributed to Cow and Chicken,
respectively? Assume Cow takes the unsold inventory. Reconcile the cash distributions to the joint
operators with the joint operation’s cash balance.
d. Provide the entries to (g) charge the unsold inventory to Cow; (h) record the joint operators’ respective
shares in the profit; and (i) cash distribution to the joint operators.
e. Provide T-account analyses on the closing of personal accounts, Joint operation account, and JO-cash
account.

Cash #2: Separate books

a. Prepare journal entries for transactions (a) to (e) above assuming separate books are maintained for the
joint operation.
b. Prepare the year-end income statement of the joint operation.
c. If the joint operation is terminated at year-end, how much cash will be distributed to Cow and Chicken,
respectively? Assume Cow takes the unsold inventory. Reconcile the cash distributions to the joint
operators with the joint operation’s cash balance.

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1. Solutions:

Case #1: No separate books

Requirement (a):
Books of Cow Books of Chicken
a. Joint operation 300 Joint operation 300
Inventory 300 Payable to Cow 300

b. Joint operation 500 JO - Cash 300

Payable to Chicken 500 Cash 300

c. No entry Joint operation 100

JO – Cash 100
d. Receivable from Chicken 800 JO - Cash 800
Joint operation 800 Joint operation 800
e. No entry Joint operation 200
JO - Cash 200

Requirement (b):
Joint operation
Merchandise contributions (a) 300
Purchases (c) 100 800 Sales (d)
Expenses (e) 200 50 Unsold invty. (g)
250 Credit balance - Profit

Requirement (c):

Joint operation - Cow

Merchandise contribution (a) 300
Share in profit (250K x 50%) 125 50 Inventory taken (g)
Cash receipt (Dr. bal.) 375

Joint operation - Chicken

Cash contribution (b) 300
Share in profit (250K x 50%) 125
Cash receipt (Dr. bal.) 425

Reconciliation:
JO - Cash
Cash contribution (b) 300
Sales (d) 800 100 Additional purchases (c)
200 Expenses paid (e)
Cash balance (Dr. bal.) 800

JO - cash balance 800

Allocation:
Cash distribution to Cow 375
Cash distribution to Chicken 425
Total 800
As allocated -

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Requirement (d):
Books of Cow Books of Chicken
g. Inventory 50 Payable to Cow 50
Joint operation 50 Joint operation 50
h. Joint operation 250 Joint operation 250
Payable to Chicken 125 Payable to Cow 125
Sh. in profit 125 Sh. in profit 125
i. Cash (squeeze) 375 Cash (squeeze) 425
Payable to Chicken 425 Payable to Cow 375
Receivable from Chicken 800 JO – cash 800

T-account analyses:

Cow’s books:
Joint operation - Cow's books
(a) 300
(b) 300 800 (d)
50 (g)
(h) 250
-

Payable to Chicken
300 (b)
(i) 425 125 (h)
-

Receivable from Chicken

(d) 800
800 (i)
-

Chicken’s books:

Joint operation - Chicken's

books
(a) 300
(c) 100 800 (d)
(e) 200 50 (g)
(h) 250
-

Payable to Cow
300 (a)
(g) 50 125 (h)
(i) 375

JO - Cash

(b) 300 100 (c)

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 (d) 800 200 (e)
800 (i)
-

Case #2: Separate books

Requirement (a):
Books of Cow Books of Chicken Joint operation’s
Books
a. Int. in JO 300 No entry Inventory 300
Inventory 300 Cow, capital 300
b. No entry Int. in JO 500 Cash 500
Cash 500 Chicken, cap. 500
c. No entry No entry Inventory 100
Cash 100
d. No entry No entry Cash 800
Sales 800

COGS 350
Inventory 350
e. No entry No entry Expenses 200
Cash 200

Requirement (b):
Sales 800
Cost of sales (300 + 100 -50) (350)
Gross profit 450
Expenses (200)
Profit 250

Requirement (c):
Int. JO - Cow
Merchandise contribution (a) 300
Share in profit (250K x 50%) 125 50 Inventory taken (g)
Cash receipt (Dr. bal.) 375

Int. in JO - Chicken
Cash contribution (b) 300
Share in profit (250K x 50%) 125
Cash receipt (Dr. bal.) 425

Reconciliation:
Cash
Cash contribution (b) 300
Sales (d) 800 100 Additional purchases (c)
200 Expenses paid (e)
Cash balance (Dr. bal.) 800

Alternative solution:
Cow, capital
300 Merchandise contribution (a)
Inventory taken (g) 50 125 Share in profit (250K x 50%)
Page | 14
 375 Cash receipt (Cr. bal.)

Chicken, capital
300 Cash contribution (b)
125 Share in profit (250K x 50%)
425 Cash receipt (Cr. bal.)

9. On January 1, 20x1, Wall.E Co. acquires 30% interest in Buy ‘n’ Large (BnL) Co. for P800, 000. Wall.E
shares joint control over BnL Co. with Eve Co., another investor. The arrangement provides both Wall.E
and Eve rights to the net assets of BnL. In 20x1, BnL reports profit of P1,200, 000 and distributes of
P200,000 to its owners.

Requirement: What amount of investment in BnL Co. shall Wall.E report in its year-end statement of financial
position?

2. Solution:
Investment in Joint Venture
beg. 800,000
Sh. In profit Sh. In dividends
360,000 60,000
(1.2M x 30%) (200K x 30%)
1,100,000 end

Joint Venture

10. In its financial statements, Pulham Corp. uses the equity method of accounting for its 30% ownership of
Angles Corp. The ownership interest gives Pulham Corp. joint control over Angles Corp., a joint venture.
At December 31, 1991, Pulham has a receivable from Angles. How should the receivable be reported in
Pulham’s 1991 financial statements?
A. The receivable should be eliminated.
B. Seventy percent of the receivable should be separately reported with the balance eliminated.
C. The total receivable should be disclosed separately.
D. The total receivable should be included as part of the investment in Angles, without separate disclosure.

C - Pulham Corp. shall use the equity method to account for its investment in joint venture. Accordingly, in its
financial statements (that are not ‘separate financial statements’), Pulham shall use the ‘one-line’ consolidation
concept. Pulham’s share in the net changes in Angels Corp.’s net assets is accounted for in its “investment”
account (balance sheet) and “share in profit or loss of joint venture” account (statement of comprehensive
income). Therefore, the receivable is not eliminated

PROBLEMS

Problem 1: (Joint Operation)

On January 2, 2017, two construction companies Lebron and Durant (the parties) set up a contractual arrangement
to construct 10 units of townhouse to be sold to the public. The contractual arrangement determines the
participation shares of Lebron and Durant and establishes joint control of the arrangement; the subject matter is
the construction and sale of the townhouses.

The parties did not set up a separate vehicle to conduct the arrangement. The contractual arrangement between
Lebron and Durant additionally establishes the following:
• The parties Lebron and Durant used their own equipment and employees in the construction activity;
• The rights to all the assets needed to undertake the activities of the arrangement are shared equally;
• The parties are severally and jointly responsible for all obligations relating to the activities of the
arrangement equally; and
• The profit or loss resulting from the activities of the arrangement is shared by Lebron and Durant equally.

Summary transactions of the joint arrangement for the year 2017 are as follows:
1. Lebron constructed 5 units of the townhouse at a total cost of P12 million.
2. Durant constructed the remaining 5 units at a total cost of P10 million.
3. Lebron and Durant sold the 10 units at P30 million.
Page | 15
Required: Prepare journal entries in the books of Lebron and Durant to account for their interests in the joint
arrangement.

Books of Lebron

Construction costs 12 M
Cash / Accounts payable 12 M
To record the construction costs incurred in 2017.

Cash 15 M
Construction revenue 15 M
To record one-half of the construction revenue earned in 2017

Construction revenue 15 M
Construction costs 12 M
Income summary 3M
To close construction revenue and costs of construction

Books of Durant

Construction costs 10 M
Cash/ Accounts payable 10 M
To record the construction costs incurred in 2017

Cash 15 M
Construction revenue 15 M
To recognize one half of the construction revenue.

Construction revenue 15 M
Construction costs 10 M
Income summary 5M
To close construction revenue and costs of construction.

Problem 2: (Joint Operation)

Bryant and Wade establish a joint arrangement (BW) using a separate vehicle, but the legal form of the separate
vehicle does not confer separation between the parties and the separate vehicle itself. Bryant and Wade have
rights to the assets and obligations for the liabilities of BW. Neither the contractual terms, nor the other facts and
circumstances indicated otherwise. Accordingly, Bryant and Wade account for their rights to assets and their
obligations for liabilities as follows:
• Bryant and Wade own 50% of the equity in BW.
• Bryant has the rights to all the property, plant and equipment.
• Bryant has the obligation to pay all the current liabilities.
• Bryant and Wade have rights to all other assets in BW, and obligations for all other liabilities in BW in
proportion to their interests (i.e. 50%).

After the first year of operation ending December 31, 2017, BW prepare the following statement of financial
position:
BW
Statement of Financial Position
December 31, 2017

Assets:
Cash P40,000
Property, plant and equipment (net) 240,000
Other assets 200,000

Page | 16
Total assets P480,000

Liabilities and equity

Current liabilities P240,000
Long-term debt 100,000
Equity 140,000
Total liabilities and equity P480,000

Required:
1. Prepare journal entries to record interest of Bryant in the assets, liabilities and equity in BW.
2. Prepare journal entries to record interest of Wade in the assets, liabilities and equity in BW.

Books of Bryant

Cash (50%) 20,000

Property, plant and equipment (100%) 240,000
Other assets (50%) 100,000
Current liabilities (100%) 240,000
Long-term debt (50%) 50,000
Equity 70,000
To record interest in joint arrangements BW

Books of Wade:

Cash (50%) 20,000

Other assets (50%) 100,000
Long-term debt(50%) 50,000
Equity 79,000
To record interest in the joint arrangements BW

Problem 3: (Accounting by an Unincorporated Joint Operation: Reporting Proportionate Share of the

Assets, Liabilities, Revenues, and Expenses of the Joint Operation)

X Inc., Y Co., and Z Inc. sign an agreement to collectively purchase an oil pipeline and to hire a company to
manage and operate the pipeline on their behalf. The costs involved in running the pipeline and the revenue
earned from the pipeline are shared by the three parties based on their ownership percentage. All major operating
and financing decisions related to the pipeline must be agreed to by the three companies. The cost of purchasing
the pipeline was P60,000,000. The pipeline has an estimated 20-yeaer useful life with no residual value. The
management fee for operating the pipeline for 20x4 was P12,000,000. Revenue earned from the pipeline in 20x4
was P19,800,000. X invested P18,000,000 for a 30% interest.

Required:
1. Prepare entries in the books of X, Inc. for 20x4 to capture or recognize its share of the activities.
2. Compute the share of X Inc. in the net income of the joint operation for 20x4.

1.
Oil Pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000,000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000,000

Oil Pipeline operating expenses (30% x P12,000,000). . . . . . . . . . . . . . 3,600,000

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600,000

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,940,000
Revenue from Oil Pipeline (30% x P19,800,000) . . . . . . . . . . . . . . . . 5,940,000

Amortization expense – pipeline (P18,000,000/20 years). . . . . . . . . . . 900,000

Accumulated depreciation – oil pipeline. . . . . . . . . . . . . . . . . . . . . 900,000

Thus, the share of X Inc. in net income of the joint operations would be as follows:

Page | 17
 Proportionate Total (100%
Share (30%) based)
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 5,940,000 P19,800,000
Less: Operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600,000 12,000,000
Amortization expense: P18,000,000 ( 30%) / 20 years. . . . . . . . 900,000
P60,000,000 (100%) / 20 years. . . . . . . . _3,000,000
Net Income of the Joint Operation. . . . . . . . . . . . . . . . . . . . . . . . . . . . P 4,800,000
Multiplied by: 30% interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __________ ______30%
Net Income of X. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 1,440,000 P 1,440,000

Problem 4: (Accounting by an Unincorporated Joint Operation: Reporting Proportionate Share of the

Assets, Liabilities, Revenues, and Expenses of the Joint Operation)

Using the same information in Problem 3, but instead of contributing cash for a 30% interest in the pipeline, X
contributed metal pipes to be used by the company constructing the pipeline. X had manufactured the pipes at a
cost of P13,200,000. All parties to the contract agreed that the fair value of these pipes was P18,000,000 and the
fair value of the pipeline once it was completed was P60,000,000. All other facts are the same as in Problem I.
The other operations have a 70% interest in the joint operation.

Required:
1. Prepare entries in the books of X, Inc. for 20x4 to capture or recognize its share of the activities related to the
oil pipeline.
2. Determine the realized gain and unrealized gain upon the contribution of the metal pipes.
3. Determine the amortization expense for the year 20x4.
4. Determine the pipeline’s net cost at the end of 20x4.

1. The following journal entries would be recorded:

Pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000,000
Steel Pipes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,200,000
Gain on steel pipes (70%* of gain). . . . . . . . . . . . . . . . . . . . . . . . . . . 3,360,000
Unrealized gain – contra account (30% of gain, P4,800,000) . . . . 1,440,000

The following should be observed in relation to the above journal entry:

• X should recognize a gain of P3,360,000 [70% x (P18,000,000 – P13,200,000)]*

• A portion of the gain can be recognized on the contribution of assets to a joint operation.

PFRS 11 indicates the following:

When an entity enters into a transaction with a joint operation in which it is a joint operator, such as a sale or
contribution of assets, it is conducting the transaction with the other parties to the joint operation and, as such,
the joint operator shall recognize gains and losses resulting from such a transaction only to the *extent of the
other parties’ interests in the joint operation. When such transactions provide evidence of a reduction in the net
realizable value of the assets to be sold or contributed to the joint operation, or of an impairment loss of those
assets, those losses shall be recognized fully by the joint operator.

• A gain can be recognized when the significant risks and rewards have been transferred.

Pipeline operating expenses (30% x P12,000,000). . . . . . . . . . . . . . . . . 3,600,000

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600,000

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,940,000
Revenue from Pipeline (30% x P19,800,000) . . . . . . . . . . . . . . . . . . . 5,940,000
Amortization expense – pipeline (P18,000,000/20 years). . . . . . . . . . . 900,000
Accumulated depreciation - pipeline. . . . . . . . . . . . . . . . . . . . . . . 900,000

Unrealized gain – contra account (P1,440,000/ 20 years). . . . . . . . . . 72,000

Amortization expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000

The following should be observed in relation to the above journal entry:

• The joint operator’s own interest in the gain is recognized over the life of the asset.

• The unrealized gain is a contra account to the pipeline account; it should not be reported as a deferred gain
on the liability side of the balance sheet. When X Inc., prepares a balance sheet, the unrealized gain will be
Page | 18
 offset against the pipeline such that the pipeline’s net cost is P16,560,000 (P18,000,000 – P1,440,000). As the net
cost of the pipeline is being amortized, the unrealized gain account is also being amortized. In effect, the
unrealized gain is being brought into income over the life of the pipeline. As the pipeline is being used to
generate revenue on transactions with outsiders, the operator’s own share of the unrealized gain is being
recognized in net income. This is similar to what happened in (Intercompany Sales of Property and Equipment)
of Volume II, when the unrealized profits from an intercompany sale of a depreciable asset were realized over
the life of the depreciable asset.

Thus, the share of X Inc. in net income of the joint operation would be as follows:

Revenue (30% x P19,800,000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 5,940,000

Less: Operating expenses (30% x P12,000,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600,000
Amortization expense: P60,000,000 x 30% = P18,000,000 / 20 years. . . . . . . . . . . 900,000
Add: Gain on steel pipes [70%* x (P18,000,000 – P13,200,000)] . . . . . . . . . . . . . . . . . 3,360,000
Realized gain – amortization**(P1,440,000/20 years). . . . . . . . . . . . . . . . . . . . . . . _____72,000
Net Income of X. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 4,872,000
* PFRS 11 states that: “When an entity enters into a transaction with a joint operation in which it is a joint operator,
such as a sale or contribution of assets, it is conducting the transaction with the other parties to the joint
operation and, as such, the joint operator shall recognize gains and losses resulting from such a transaction only
to the *extent of the other parties’ interests in the joint operation.”
** Sales price of P18,000,000 – P13,200,000, cost of steel pipes = P4,800,000 x 30% = P1,440,000

2. refer to the above entry

Gain on steel pipes (70%* of gain). . . . . . . . . . . . . . . . . . . . . . . . . . . P3,360,000
Unrealized gain – contra account (30% of gain, P4,800,000) . . . . P1,440,000

3.
Amortization expense – pipeline (P18,000,000/20 years). . . . . . . . . . . P 900,0000
Less: Amortization expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____72,000
Amortization expense for the year………………………………………… P 828,000

4.
Pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P18,000,000
Less: Net unrealized gain, end of 20x4:
Unrealized gain – contra account (30% of gain, P4,800,000) . . P1,440,000
Less: Amortization for 20x4…………………………………………… ____72,000 __1,368,000
Net cost of Oil Pipeline………………………………………………………. P16,632,000

Problem 5: (Joint operation – contribution cash) A, B and C sign an agreement to collectively purchase an oil
pipeline and to hire a company to manage and operate the pipeline on their behalf.

The cost involved in running the pipeline and the revenue earned from the pipeline are share by the three parties
based on their ownership interest. All major operating and financing decisions related to the pipeline must be
agreed to by the three companies.

The cost of purchasing the pipeline was P140,000,000. The pipeline has an estimated 20 years life with no residual
value.

The management fee for operating the pipeline for 20x0 was P28,000,000. Revenue earned from the pipeline was
P46,200,000. A Co. invested P42,000,000 for a 30% interest.

Required:
1. Compute the share of A Co. in the revenue of the joint operation for 20x0.
a. P28,000,000 b. P42,000,000 c. P13,860,000 d. P3,360,000

2. Compute the share of A Co. in the expense of the joint operation for 20x0.
a. P8,400,000 b. P2,100,000 c. P10,500,000 d. P13,860,000

3. Compute A Co.’s net income in the joint operation for 20x0.

a. P3,360,000 b. P42,000,000 c. P13,860,000 d. P28,000,000

Page | 19
 Total revenue 46,200,000
x interest 30%
Share in Revenue 13,860,000

Management fee 28,000,000

Depreciation (140,000,000 / 20 yrs) 7,000,000
Total expenses 35,000,000
x interest 30%
Share in expenses 10,500,000

Share in Revenue 13,860,000

Share in expenses (10,500,000)
Total net income 3,360,000

Problem 6: (Joint operation – contribution non-cash) Using the information in Problem 5 instead of
contributing cash for a 30% interest in the pipeline, A Co. contributed steel pipes to be used by the company
constructing the pipeline. A Co. had manufactured the pipes at a cost of P30,800,000. All parties to the contract
agreed that the fair value of these pipes was P42,000,000 and the fair value of the pipeline once it was completed
was P140,000,000. All other facts are the same as in the previous exercise no. 3. The other operators have a
70% interest in the joint operation.

Required:
1. Determine the realized gain upon the contribution of the steel pipes:
a. Zero b. P3,360,000 c. P11,200,000 d. P7,840,000

2. Determine the unrealized gain upon the contribution of the steel pipes:
a. P11,200,000 b. P7,840,000 c. P3,360,000 d. Zero

3. Which is incorrect?
a. A Co. will debit Pipeline account in the amount of P42,000,000
b. A Co. will credit contributed Steel pipes account in the amount of P30,800,000
c. A Co. will credit gain on steel pipes account in the amount of P11,200,000.
d. A Co. will credited unrealized gain – contra account in the amount of P3,360,000.

4. Determine the amortization expense for the year 20x0:

a. Zero b. P1,932,000 c. P2,100,000 d. P168,000

5. Determine the pipeline net cost at the end of 20x0:

a. P0 b. P38,640,000 c. P42,000,000 d. P38,808,000

Required 1
Fair value of pipeline 42,000,000
Cost of pipeline (30,800,000)
Gain on sale of pipeline 11,200,000
x interest of other party 70%
Realized gain 7,840,000

Note: When an entity enters into a transaction with a joint operation in which it is a joint operator, such as a sale
or contribution of assets, it is conducting the transaction with the other parties to the joint operation and , as such,
the joint operator shall recognize gains and losses resulting from such a transaction only to the extent of
the other parties interest in the joint operation.

Page | 20
 Required 2
Fair value of pipeline 42,000,000
Cost of pipeline (30,800,000)
Gain on sale of pipeline 11,200,000
x interest of A co. 30%
Unrealized gain 3,360,000

Required 3
Pipeline 42,000,000
Steel pipes 30,800,000
Gain on pipeline (70% x 11,200,000) 7,840,000
Unrealized gain - contra account (30% x 11,200,000) 3,360,000

Required 4
Fair value of pipeline 42,000,000
divide by useful life 20
Amortization / depreciation 2,100,000
Less: Amortization of unrealized gain
(3,360,000 / 4 years) (168,000)
Total amortization expenses 1,932,000

Note: The amortization of unrealized gain shall be recoded as:

Unrealized gain - contra account 168,000

Amortization expense 168,000

The amortization of pipeline shall be recorded as:

Amortization expense-pipeline 2,100,000

Accumulated depreciation -pipeliine 2,100,000

Required 5
Fair value of pipeline 42,000,000
Less: Unrealized gain (3,360,000-168,000) (3,192,000)
Net cost of pipeline 38,808,000

Problem 7: (Joint operation – Partnership in Nature)

The following information is available:

Investment in Joint Operations
20X4
Nov. 6 Merchandise-Jose P8,500 Nov. 20 Cash sales-Allan P20,400
8 Merchandise-Dario 7,000 12 Cash sales-Allan 4,200
10 Freight paid-Allan 200 28 Merchandise-Dario 1,210
12 Advertising-Allan 150
Dec. 8 Purchase-Allan 3,500
14 Selling expense-Allan 400
The joint arrangement provided for the division of gains and losses among Jose, Dario and Allan in the ratio of
2:3:5. The arrangement was to close as of December 31, 20X4.

1. The total gain from the joint arrangement amounted to:

A. P6,060 B. P12,120 C. P18,180 D. None

2. As final settlement, Jose received in cash:

A. P6,060 B. P7,608 C. P8,080 D. P9,712

Page | 21
Problem 8: (Joint Venture)

Two real estate companies, Lin and Kid (the parties) set ip a separate (LK) for the purpose of acquiring and
operating a shopping mall. The contractual arrangement between the parties establishes joint control of the
activities that are conducted in LK. The legal form of LK is that LK, not the parties, has the rights to the assets, and
obligations for the liabilities, relating to the arrangement. The activities of the arrangement include the rental of
the retail units, managing the car park, maintaining the mall and its equipment, such as escalators, and
establishing the reputation and customer base for the mall as a whole.

The terms of the contractual arrangement are such that:

a. Entity LK owns the shopping mall.
b. The liability of each party is limited to the unpaid amount of their capital contribution.
c. The parties have the right to sell or pledge their interests in entity LK.
d. Each party receives a share of the income from operating the shopping mall (which is the rental income
net of the operating costs and expenses) in accordance with its interests in entity LK.

Summary transactions of the joint arrangement are as follows:

2017 2018
Contributions: Company Lin P10 million P-
Company Kid 10 million -
Rental income 4 million 5 million
Costs and expenses 2 million 2 million
Dividends declared and paid - 1 million

Required: Prepare journal entries in the books of Companies Lin and Kid to record their interest in the joint
arrangement for 2017 and 2018.

Books of Lin:

2017:
Investment in joint venture 10 M
Cash 10 M
To record investment in the joint venture

Investment in joint venture 1 M

Income from joint venture 1 M
To record share in the net income of LK (2 M x ½).

2018:
Investment in joint venture 1.5 M
Income from Joint Venture 1.5 M
To record share in the net income of LK (3 M x ½).

Cash .5 M
Investment in joint venture .5 M
To record dividends received from LK.

Books of Kid:

2017:
Investment in joint venture 10 M
Cash 10 M
To record investment in the joint venturet

Investment in joint venture 1M

Income from joint venture 1 M
Page | 22
To record share in the net income of the joint venture

2018:
Investment in joint venture 1.5 M
Income from joint venture 1.5 M
To record share in the net income of the joint venture.

Cash .5 M
Investment in joint venture .5 M
To record dividends received for the year.

Problem 9: (Joint Venture- Upstream and Downstream Sales) On January 1, 20X6, Reyes Corporation and
Joy Corporation established joint arrangement through an incorporated entity named RJ Corporation. The
contractual arrangement provides that the relevant activities of RJ Corporation will require unanimous consent of
both parties which will share control of the corporation. RJ Corporation will control its assets, will incur liabilities
and expenses and will earn income. RJ Corporation may enter into contracts in its own name and raises finance for
purposes of the arrangement. The joint controlling corporations will have rights only to the net assets of the
arrangement.

At the date of incorporation, Reyes Corporation contributed cash of P10,000,000 while Joy Corporation contributed
land and building with a total fair value of P15,000,000. Each corporation will have 50% of the authorized ordinary
shares of RJ Corporation. For the year ended December 31, 20X6, RJ Corporation reported net income of
P5,000,000 and distributed cash dividends in the amount of P2,000,000.

For the year ended December 31, 20X6, the following transactions occurred:

• On July 1, 20X6, RJ Corporation sold an office equipment to Reyes Corporation for P400,000. As of this
date the equipment has a book value of P600,000 with remaining useful life of 2 years.
• On October 1, 20X6, RJ Corporation sold an inventory to Joy Corporation at a selling price of P1,000,000.
RJ Corporation has a normal gross profit rate of 40% based on sale. 60% of the inventory was resold by
Joy Corporation to third persons during 2016.

Required:

1. What is the book value of investment in the joint venture to be presented by Reyes Corporation in its
December 31, 20X6 statement of financial position?
A. P11,575,000 B. P11,500,000 C. P11,495,000 D. P11,615,000

2. What is the book value of investment in joint venture to be presented by Joy Corporation in its December 31,
20X6 in its December 31, 20X6 statement of financial position?
A. P16,420,000 B. P16,500,000 C. P16,495,000 D. P16,625,000

Problem 10: (Impairment losses) ABC Co. owns 40% of the ordinary shares of XYZ, Inc. The investment in
associate account has a carrying amount of P1,000,000 on December 31, 20X1. ABC assessed that the investment
may be impaired. After impairment testing, ABC determined the following:
• Fair value less costs of disposal P800,000
• Value in use of the investment P790,000
Required: Prepare journal entries to record impairment loss.

Impairment loss 200,000

Investment in associate 200,000

Problem 11: (Investment in Associate – share in losses) Jopay Company is an associate of Zorro Company,
before adjustments, as of December 31, 20x7 are the following:
Trade Receivables – Jopay P150,000
Trade payables – Jopay 500,000
Advances from Associate – Jopay 400,000
Advances to Associate – Jopay 350,000
Loans Receivables – Jopay; Due January 1, 20x8 secured 1,000,000
Page | 23
Investment in preference shares- Jopay 1,000,000
Investment in associate – Jopay; 30% interest 275,000

Results of Jopay’s operationos are as follows:

Year Net Income ( Loss)
20x7 (P3,000,000)
20x8 (2,000,000)
20x9 (1,000,000)
20x10 2,800,000

Required: Account for the net income (loss) of the associate from 20x7 to 20x10

The interest in the associate in 20X1 before adjustment is computed as follows:

Rank (loss) Rank (recovery)
Investment in associate P275,000 1 3
Investment in preference shares 1,000,000 2 2
Advances to associate-ABC 350,000 3 1
Total P1,625,000

Total interest does not include the following:

1. Trade receivables
2. Trade payables
3. Any long-term receivables for which adequate collateral exists, such as secured loans.

20X7
Investment loss-associate 900,000
Investment in associate 275,000
Investment in preference shares (balancing) 625,000

20X8
Investment loss-associate 600,000
Investment in preference shares 375,000
Advances to associate (balancing) 225,000

20X9
Investment loss-associate 125,000
Advances to associate 125,000

20X10
Advances to associate 350,000
Investment in preference shares (balancing) 315,000
Investment income – associate 665,000

Problem 12: (SMEs)

On January 1, 2017, SME X and SME Y each acquired 25 per cent interest in entities A, B and C for P100,000,
P150,000 and P280,000 respectively. SME X and SME Y have joint control over the strategic financial and operating
decisions of entities A, B and C. Transaction costs of 1 per cent of the purchase price of the shares were incurred
by SME X and SME Y.

On January 2, 1017, entity A declared and paid dividends of P10,000 for the year ended 2016. On December 31,
2017, entity B declared a dividend of P80,000 for the year ended 2017. The dividend declared by entity B was paid
in 2018.

For the year ended December 31, 2017, entities A and B recognized profit of P50,000 and P180,000, respectively.
However, entity C reported a loss of P200,000 for the year.

Published price quotation does not exist for the shares of entities A, B and C. Using appropriate valuation
techniques, the venturers (SME X and SME Y) determined the fair value of each of their investment in entities A, B
and C at December 31, 2017 as P130,000, P290,000 and P150,000, respectively. Costs to sell are estimated at 5
per cent of the fair value of the investments.

Neither SME X nor SME Y prepare consolidated financial statements because they do not have any subsidiaries.
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Required:
1. Assuming SME X measures its investments in jointly controlled entities using the cost model and SME Y
measures its investment in jointly controlled entities using the fair value model, prepare accounting
entries to record the investments in the jointly controlled entities in the accounting records of SME X and
SME Y for the year ended December 31, 2017.
2. Assuming instead that SME X measure all its investments in jointly controlled entities using the equity
method, prepare accounting entries in the books of SME X to record its investment in jointly controlled
entities for the year ended December 31, 2017.

Requirement (1)

Books of SME X (Cost Model):

2017:
January 1:

Investment in jointly controlled entity (entity A) 100,000

Investment in jointly controlled entity (entity B) 150,000
Investment in jointly controlled entity (entity C) 280,000
Cash 530,000
To record acquisition of investments in jointly controlled entities.

Investment in jointly controlled entity (entity A) 1,000

Investment in jointly controlled entity (entity B) 1,500
Investment in jointly controlled entity (entity C) 2,800
Cash 5,300
To record transaction costs incurred .

January 2:

Cash 2,500
Dividend income (profit or loss) 2,500
To record dividends received from entity A (P10,000 x 25%)

January 31:

Dividend receivable (entity B) 20,000

Dividend income 20,000
To record dividend receivable from entity B (P80,000 x 25%).

Impairment loss 140,300

Investment in jointly controlled entity (entity C) 140,300
To record impairment of the investment in entity C.

Computations of the impairment loss:

Cost of investment in entity C (P280,000 + P2,800) P282,800

Fair value P150,000
Less estimated cost to sell (P150,000 x 5%) 7,500 142.500
Impairment loss P140,300

Books of SME Y (Fair Value Model):

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2017:
January 1:

Investment in jointly controlled entity (entity A) 100,000

Investment in jointly controlled entity (entity B) 150,000
Investment in jointly controlled entity (entity C) 280,000
Cash 530,000
To record acquisition of investments in jointly controlled entities.

Transaction costs (profit or loss) 5,300

Cash 5,300
To record transaction costs incurred (P530,000 x 1%)

Cash 2,500
Dividend income (profit or loss) 2,500
To record dividends received from entity A (P10,000 x 25%)

December 31:

Dividend receivable 20,000

Dividend income 20,000
To record dividend receivable from entity B (P80,000 x 25%).

Profit or loss (change in fair value) 130,000

Investment in jointly controlled entity (entity C) 130,000
To record the decrease in fair value of investment in entity C (P280,000 cost less P150,000 fair value.

Investment in jointly controlled entity (entity A) 30,000

Investment in jointly controlled entity (entity B) 140,000
Profit or loss (change in fair value) 170,000
To record increase in fair value of investments in jointly controlled entities A and B.

Entity A Entity B
Fair value P130,000 P290,000
Cost 100,000 150,000
Increase P 30,000 P140,000

Requirement (2)

Books of SME X (equity method):

2017
January 1:

Investment in jointly controlled entity (entity A) 100,000

Investment in jointly controlled entity (entity B) 150,000
Investment in jointly controlled entity (entity C) 280,000
Cash 530,000
To record acquisition of investments in jointly controlled entities.

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Investment in jointly controlled entity (entity A) 1,000
Investment in jointly controlled entity (entity B) 1,500
Investment in jointly controlled entity (entity C) 2,800
Cash 5,300
To record transaction costs incurred.

January 2:

Cash 2,500
Investment in jointly controlled entity (entity A) 2,500
To record dividends received from entity A (P10,000 x 25%)

December 31:

Dividends receivable (entity B) 20,000

Investment in jointly controlled entity (entity B) 20,000
To record dividend receivable from entity B (P80,000 x 25%)

Investment in jointly controlled entity (entity A) 12,500

Income from jointly controlled entity (Profit or loss) 12,500
To record share of entity A’s profit for the year (P50,000 x 25%).

Investment in jointly controlled entity (entity B) 45,000

Income from jointly controlled entity (Profit or loss) 45,000
To record the share of entity B’s profit for the year (P180,000 x 25%)

Loss from jointly controlled entity (Profit or loss) 50,000

Investment in jointly controlled entity (entity C) 50,000
To record share of entity C’s loss for the year (P200,000 x 25%).

Impairment loss (profit or loss) 90,300

Investment in jointly controlled entity (entity C) 90,300
To record impairment of the investment in entity C:
Cost (P282,800 – P50,000) P232,800
Less fair value P150,000
Cost to sell (P150,000 x 5%) (7,500) 142,500
Impairment loss P 90,300

Contributions to the Joint Venture ( PFRS 11)

Suppose that on the date of formation of a joint venture, instead of contribution of cash, a venture contributes
non-monetary assets and receives an interest in the joint venture and that the assets contributed have a fair value
that is greater than their carrying amount in the records of venture. Would it be appropriate for the venture to
record a gain from investing these non-monetary assets in the joint venture? If so, how much, and when should it
be recognized?

The requirements set out in PFRS 11 regarding this matter are as follows:

1. The investment should be recorded at the fair value of the non-monetary assets transferred to the joint
venture.

2. Only the gain represented by interest of the other nonrelated venturers should be recognized on the date of
contribution and only if the transaction has commercial substance as per PAS 16. This principle was applied in
on a transfer of an asset to a joint operation. If the transaction does not have commercial substance, then the
entire gain is considered to be unrealized. It shall be accounted for in the manner as the venturer’s share of
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 the gain.

3. The portion of the gain represented by the venturer’s own interest should be unrealized until the asset has
been sold to unrelated outsiders by the joint venture. Alternatively, the unrealized gain can be recognized
over the life of the asset if the asset is being used to generate a positive gross profit for the joint venture. In
effect, the product or service being sold by the joint venture to an outsider is allowing the venture to recognize
a portion of the unrealized gain. It is similar to selling a portion of the asset to outsiders. The unrealized
gains are contra accounts to the investment in the joint venture account. They will be offset in the investment
account on the balance sheet.

4. If a loss results from the recording of the investment, the portion of the loss represented by the interest of the
other unrelated venturers is recognized immediately into income. When it is evident that the asset contributed
to the joint venture is impaired, the entire loss is immediately recognized.

5. When the venture transfer assets to the joint venture and receives assets in addition to an interest in the joint
venture, the assets received can be considered the proceeds from the partial sale of the assets to the other
unrelated venturers, provided that the assets came from the investment of the other venturers or from the
other venturers’ share of joint venture borrowings.

SPECIAL ISSUES

PROBLEM A (Contributions of Non-Monetary Assets to the Joint Venture): J Co. and K Inc. formed JK
Company on January 1, 20x4 J. Co. Invested equipment with a carrying amount of P120,000 and a fair value of
P420,000 for a 40% interest in JK Company, while B Inc. contributed equipment, which was similar to the
equipment contributed by J Co., with a total fair value of P630,000, for a 60% interest in JK Company.

The equipment has an estimated useful life of 10 years. On December 31, 20x4, JK Company reported a net
income of P122,400. Assume that the transaction does not have commercial substance in this situation because J
Co. owned a similar portion of the same type of equipment both before and after the contribution to the joint
venture.

Required: Using Equity Method

1. Determine the book value of the investment in joint venture on December 31, 20x4.
2. Determine the unrealized gain on transfer to JK Company (the separate vehicle) on January 1, 20x4
3. Prepare entries in the books of the joint venture in 20x4 in relation to its investment in JK Company.
4. Determine the realized gain through depreciation on transfer of equipment to JK Company on
December 31, 20x4
5. Determine the gain on transfer of equipment to be presented in the 20x4 income statement.

1. P468,960. Refer to No. 3 as a guideline, review the entries: P420,000+P48,960 = P468,960.

2.
Fair value of equipment transferred to JK Company…………………………………. P 420,000
Carrying amount of equipment on J Company’s books………………………………… __120,000
Unrealized gain on transfer to JK Company……………………………………………. P 300,000

3. A Company’s journal entry to record the initial investment on January 1, 20x4 is as follows:
Investment in JK Company…………………………………………….. 420,000
Equipment………………………………………………………………….. 120,000
Unrealized gain – contra account…………………………………….. 300,000

Using the equity method of accounting, J Co. will record its 40% share of the yearly net incomes or losses
reported by JK Company.; in addition, it will recognize the unrealized gains in income over the life of the
equipment.

The December 31, 20x4, entries are as follows:

Investment in JK Company…………………………………………….. 48,960

Investment income from JK Company (40% x P122,400)…….. 48,960

Unrealized gain – contra account (P300,000/10)………………………. 30,000

Gain on transfer of equipment to JK Company……………….. 30,000

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 This method of recognizing the gain from investing will be repeated over the next nine years, unless JK
Company sells this equipment before that period expires. If it does, J Co. will immediately take the balance in
the unrealized gains account into income.
4. P30,000 – refer to No. 3 for computation
5. P30,000 – refer to No. 3 for computation

PROBLEM B (Contributions of Non-Monetary Assets to the Joint Venture) : The facts from this example are
identical in all respects to those from Problem A, except that K Co. contributes technology (rather than
equipment) with a fair value of P630,000. Assume that the transaction does have commercial substance in this
situation because J Co. owned equipment before its contribution to the joint venture but indirectly owned a portion
of equipment and technology after the contribution.

Required: Using Equity Method

1. Determine the book value of the investment in Joint Venture on December 31, 20x4.
2. Determine the unrealized gain and realized gain on transfer to JK Company (the separate vehicle) on
January 1, 20x4
3. Prepare entries in the books of the joint venture in 20x4 in relation to its investment in JK Company
4. Determine the realized gain in income statement on transfer of equipment to JK Company on
December 31, 20x4.

1. P468,960. Refer to No. 3 as a guideline, review the entries: P420,000+P48,960 = P468,960.

2. Unrealized gain, P120,000 – refer to No. 2 for computation
Realized gain, P180,000 – refer to No. 2 for computation

3.
J Co.’s journal entry to record the initial investment on January 1, 20x4, is as follows:
Investment in JK Company…………………………………………….. 420,000
Equipment………………………………………………………………….. 120,000
Gain on sale of equipment…………………………………………….. 180,000
Unrealized gain – contra account…………………………………….. 120,000
Note: J Co. recognizes a gain of P10,000, which is the portion of the gain deemed sold to outsiders.

The December 31, 20x4, entries are as follows:

Investment in JK Company…………………………………………….. 48,960
Investment income from JK Company (40% x P122,300)…….. 48,960

Unrealized gain – contra account (P120,000/10)………………………. 12,000

Gain on transfer of equipment to JK Company……………….. 12,000
Note: J portion of the unrealized gain is taken into income each year.

This method of recognizing the gain from investing will be repeated over the next nine years, unless JK
Company sells this equipment before that period expires. If it does, J Co. will immediately take the balance in
the unrealized gains account into income.

4. P192,000 = P180,000 + P12,000 (refer to No. 2 for computation)

PROBLEM C (Contributions to Non-Monetary Assets to the Joint Venture): The facts from this problem are
identical in all respects to those from Problem A, except that J Co. receives a 40% interest in JK Company, plus
P78,000 in cash in return for investing equipment with a fair value of P420,000, while K Inc. contributed equipment
with a fair value of P435,000 plus cash of P78,000, for a total contribution of P513,000.

Required: Using Equity Method

1. Determine the book value of the investment in Joint Venture on December 31, 20x4.
2. Determine the immediate gain from selling equipment to K Inc. on January 1, 20x4
3. Determine the unrealized gain on transfer to JK Company (the separate vehicle) on January 1, 20x4

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 4. Determine the realized gain through depreciation on transfer of equipment to JK Company on
December 31, 20x4
5. Determine the gain on transfer of equipment to be presented in the 20x4 income statement

1. P390,960. Refer to Nos. 3 and 4 as a guideline, review the entries: P342,000+P48,960 = P390,960.
2.
Sales proceeds……………………………………………………………………………………. P 78,000
Carrying amount of equipment on sold (P78,000/P420,000 x P120,000)…………….. __ 22,285
Immediate gain from selling equipment to K Inc.…………………………………………. P 55,715
Note: J gain is recognized for the portion (P78,000/P420,000) of the equipment deemed to be sold.

3. P244,285
A Company’s January 1, 20x4, journal entry to record the investment of equipment and the receipt of cash would
be as follows:
Cash……………………………………………………………………………... 78,000
Investment in JK Company…………………………………………….. 342,000
Equipment………………………………………………………………….. 120,000
Gain on transfer of equipment to JK Company……………….. 55,715
Unrealized gain – contra account…………………………………….. 244,285

4. P24,428
The December 31, 20x4, entries are as follows:
Investment in JK Company…………………………………………….. 48,960
Investment income from JK Company (40% x P122,400)…….. 48,960

Unrealized gain – contra account (P244,285/10)………………………. 24,428

Gain on transfer of equipment to JK Company………………... 24,428

Assuming on December 31 year-end, the P80,143 (P55,715 + P24,428) gain on transfer of equipment to JK
Company will appear in J Co’s 20x4 income statement. The unamortized balance of the J’s share of the
unrealized gain of P219,857 (P244,285 – P24,428) will be offset against the investment account.

5. P80,143 = P55,715 (refer to No. 2) + P24,428 (refer to No. 4)

PROBLEM D : In this illustration assuming the increase in the amount of cash that J Co. received when it invested
equipment for a 40% interest in JK Company. Assume the cash received was P90,000 instead of the P78,000 that
was used in Problem C. Because K Inc. invested only P78,000 cash in the joint venture, the additional P12,000
was borrowed by JK Company.

Required Using Equity Method:

1. Determine the book value of the investment in Joint Venture on December 31, 20x4
2. Determine the sales proceeds and the return of equity to J Company
3. Determine the immediate gain from selling equipment to K Inc. on January 1, 20x4
4. Determine the unrealized gain on transfer to JK Company (the separate vehicle) on January 1, 20x4
5. Determine the realized gain through depreciation on transfer of equipment to JK Company on
December 31, 20x4
6. Determine the gain on transfer of equipment to be presented in the 20x4 income statement.

1. P378,960. Refer to Nos. 4 and 5 as a guideline, review the entries: P330,000+P48,960 = P378,960.
2.
The allocation of the cash between sale proceeds and return of equity is made as follows:
Sales proceeds:
From K Inc.’s investment in JK Company……………………………. P 78,000
From borrowings of JK Company……………………………………... P 12,000
KInc.’s proportion……………………………………………………………. __ 60% __ 7,200
P 85,200
Return of equity to J Company:
From K Inc.’s investment in JK Company……………………………. P 12,000
J Company’s proportion of JK borrowings…………………………. __ 40% ___4,800
Total cash received……………………………………………………………. P 90,000
Note: When some of the cash received by J Co. comes from joint venture borrowings, only K Co.s share
of the cash borrowed is considered proceeds from the sale of equipment.
3. P60,857

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 The gain from selling is computed as follows:
Sales proceeds……………………………………………………………………………………. P 85,200
Carrying amount of assets sold (P85,200/P420,000) x P120,000………………………..... __24,343
Immediate gain from selling equipment to K Inc.………………………………………….. P 60,857

4. P239,143
J Company’s January 1, 20x4, journal entry would be as follows:
Cash……………………………………………………………………………... 90,000
Investment in JK Company…………………………………………….. 330,000
Equipment………………………………………………………………….. 120,000
Gain on transfer of equipment to JK Company……………….. 60,857
Unrealized gain – contra account…………………………………….. 239,143
Note: The realized gain is based on the portion of the equipment deemed to be sold to the other venturers.

5. P23,914
The December 31, 20x4, entries are as follows:
Investment in JK Company…………………………………………….. 48,960
Investment income from JK Company (40% x P122,400)…….. 48,960

Unrealized gain – contra account (P239,143/10)……………………. 23,914

Gain on transfer of equipment to JK Company……………….. 23,914

6. P84,771 = P60,857 (refer to No. 3) + P23,914 (refer to No. 5)

Part I: Theory of Accounts

1. It is characterized by a contractual arrangement whereby two or more parties have joint control of the
arrangement.
A. Joint arrangement
B. Joint operation
C. Joint venture
D. Jointly controlled asset

2. It is the contractually agreed sharing of control of an arrangement which exists only when decisions about
relevant activities require unanimous consent of the parties sharing control.
A. Control
B. Significant influence
C. Joint control
D. Solidary control

3. It is a type of joint arrangement whereby the parties that have joint control of the arrangement have right to
the total assets and obligations for the total liabilities relating to the arrangement.
A. Joint venture
B. Jointly controlled assets
C. Joint operation
D. Joint business

4. It is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to
the net assets of the arrangement.
A. Joint venture
B. Jointly controlled asset
C. Joint operation
D. Joint business

5. What is the classification of the joint arrangement when the arrangement is structured without a separate
vehicle such as when the rights of each party to the total assets and obligations for total liabilities relating to
the arrangement are clearly established?
A. It shall be classified as joint venture
B. It shall be classified as joint operation
C. Neither joint venture nor joint operation
D. It can be either a joint operation or joint venture depending on the company policy of the parties to the
joint arrangement.

6. What is the classification of the joint arrangement when the assets and liabilities relating to the arrangement
are held by a separate vehicle or when the arrangement is established with a separate vehicle?

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 A. It shall be classified as joint venture.
B. It shall be classified as joint operation.
C. Neither joint venture nor joint operation.
D. It can be either a joint operation or joint venture depending on the legal form of the separate vehicle,
terms of the contractual arrangement or other relevant facts and circumstances.

7. Under PFRS 11, how shall the joint venturer account for its Investment in Joint Venture?
A. Equity method
B. Cost method
C. Fair value method under IFRS 9
D. Proportionate consolidation

8. Under PFRS 11, as an exception to the general rule of mandatory equity method accounting for Investment in
Joint Venture, what is alternative treatment available to joint venture for an investment in joint venture held or
is held indirectly through an entity that is a venture capital organization, mutual trust fund, unit trust and
similar entities including insurance-liked fund?
A. It may elect to measure the investment in joint venture at fair value through profit or loss
B. It may elect to measure the investment in joint venture at fair value through other comprehensive income
C. It may elect to measure the investment in joint venture at cost method
D. It may elect to measure the investment in joint venture at proportionate consolidation

9. Under PFRS for SMEs, how shall the joint venture account for its Investment in Joint Venture?
A. Equity method
B. Cost method
C. Fair value through profit or loss method under PFRS 9
D. Any of the above

10. Under PFRS 11, how shall the joint operator account for its interest in a joint operation?
A. The joint operator shall account for its interest under Equity Method
B. The joint operator shall account for its interest under Cost Method
C. The joint operator shall account for its interest using proportionate consolidation
D. The joint operator shall account for its interest by recognizing its assets, its liabilities, its revenue, its
expenses and its shar in the jointly controlled assets, jointly incurred liabilities, jointly eared revenue and
jointly incurred expenses in accordance with the contractual arrangement.

Part II: Problem Solving

Use the following information for the next two (2) questions:

On January 1, 20x18, Entity A, a public entity, and Entity B, a public entity, incorporated Entity C, which has its
fiscal and operational autonomy. The contractual agreement of the incorporating entities provided that the
decisions on relevant activities of Entity C will require the unanimous consent of both entities. Entity A and Entity
B will have rights to the net assets of Entity C.

Entity A and Entity B invested P1,000,000 and P1,500,000 respectively, equivalent to 40:60 capital interest of
Entity C. The financial statements of Entity C provided the following data for its two-year operation:

Net income (loss) Dividends declared

20x18 P200,000 P100,000
20x19 (2,000,000)

1. What is the balance of Investment in Entity C to be reported by Entity A in its Statement of Financial Position
on December 31, 20x19?
A. P1,080,000 B. P1,040,000 C. P240,000 D. P200,000

2. What is the balance of Investment in Entity C to be reported by Entity B in its Statement of Financial Position
on December 31, 20x19?
A. P1,500,000 B. P1,620,000 C. P360,000 D. P900,000

Use the following information for the next three (3) questions:

Entity A and Entity B incorporated Entity C to manufacture a microchip to be used by the incorporating entities as
component for their final products of cellular phones and tablets.

Page | 32
The contractual agreement of the incorporating entities provided that the decisions on relevant activities of Entity C
will require the unanimous consent of both entities.

Entity A and Entity B have rights to the assets, and obligations for the liabilities, relating to the arrangement. The
ordinary shares of Entity C will be owned by Entity A and Entity B in the ratio of 60:40. At the end of first
operation of Entity C, the financial statements provided the following data:

Inventory P1,000,000 Accounts payable P2,000,000

Land 3,000,000 Note payable 1,000,000
Building 5,000,000 Loan payable 4,000,000
Share capital 1,000,000
Retained earnings 1,000,000
Sales revenue 5,000,000

The contractual agreement of Entity A and Entity B also provided for the following concerning the assets and
liabilities of Entity C:
• Entity A owns the land and incurs the loan payable of Entity C.
• Entity B owns the building and incurs the note payable of Entity C.
• The other assets and liabilities are owned or owed by Entity A and Entity B on the basis of their capital
interest in Entity C.
• The sales revenue of Entity C includes sales to Entity A and Entity B in the amount of P1,000,000 and
P2,000,000, respectively. As of he end of the first year, Entity A and Entity B were able to resell 30% and
60% of the inventory coming from Entity C to third persons.

3. What is the amount of total assets to be reported by Entity A concerning its interest in Entity C?
A. P5,400,000 B. P3,000,000 C. P3,600,000 D. P5,000,000

4. What is the amount of total liabilities to be reported by Entity B concerning its interest in Entity C?
A. P1,800,000 B. P2,200,000 C. P2,800,000 D. P2,400,000

5. What is the amount of sales revenue to be reported by Entity A concerning its interest in Entity C?
A. P2,300,000 B. P2,100,000 C. P3,000,000 D. P2,500,000

Use the following information for the next two (2) questions:

On January 1, 20x20, Entity A, a public entity, and Entity B, a public entity, incorporated Entity C by investing
P3,000,000 and P2,000,000 for capital interest ratio of 60:40. The contractual agreement of the incorporating
entities provided that the decisions on relevant activities of Entity C will require the unanimous consent of both
entities. Entity A and Entity B will have rights to the net assets of Entity C.

The financial statements of Entity C provided the following data for 20x20:
• Entity C reported net income of P1,000,000 for 20x20 and paid cash dividends of P400,000 on December
31, 20x20.
• During 20x20, Entity C sold inventory to Entity A with gross profit of P50,000. Eight percent of those
inventories were resold by Entity A to third persons during 20x20 and the remainder was resold to third
persons during 20x21.
• On July 1, 20x20, Entity C sold a machinery to Entity B at a loss of P20,000. At the time of sale, the
machinery has remaining useful life of 2 years.

6. What is the investment income to be reported by Entity A for the year ended December 31, 20x20?
A. P603,000 B. P606,000 C. P594,000 D. P597,000

7. What is the balance of Investment in Entity C to be reported by Entity B on December 31, 20x20?
A. P2,246,000 B. P2,241,000 C. P2,238,000 D. P2,248,000

Use the following information for the next two (2) questions:

On January 1, 20x20, Storm Inc. invested P2,000,000 cash in a joint venture for 50% interest. For the years
ended December 31, 20x20, 20x21 and 20x22, the joint venture reported the following net incomes and dividend
distributions:
Year Net Income / (Net Loss) Dividend Distribution
20x20 P1,000,000 P300,000

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 20x21 (P6,000,000) -
20x22 P7,000,000 P500,000

8. What is the share in net loss or investment loss to be reported by Storm Inc. for the year ended December 31,
20x21?
A. P3,000,000 B. P2,500,000 C. P2,350,000 D. P2,000,000

9. What is the book value of Investment in Joint Venture to be reported by Storm Inc. as of December 31,
20x22?
A. P1,600,000 B. P2,600,000 C. P1,250,000 D. P1,450,000

Use the following information for the next three (3) questions:

On January 1, 20x20, Logan Inc., a small and medium enterprise (SME), invested P500,000 cash in a joint venture
for 50% interest. For the year ended December 31, 20x20, the joint venture reported net income of P200,000 and
distributed cash dividend in the amount of P60,000. As of December 31, 20x20, the fair value of the investment in
joint venture is P600,000 and the estimated costs of disposal is 10% of fair value. The value in use of the
investment is estimated at P550,000.

10. Under IFRS for SMEs, what is the book value of Investment in Joint Venture to be reported by Logan Inc. as of
December 31, 20x20 if the SME elects equity method?
A. P550,000 B. P540,000 C. P570,000 D. P600,000

11. Under IFRS for SMEs, what is the book value of Investment in Joint Venture to be reported by Logan Inc. as of
December 31, 20x20 if the SME elects cost method?
A. P550,000 B. P540,000 C. P570,000 D. P500,000

12. Under IFRS for SMEs, what is the book value of Investment in Joint Venture to be reported by Logan Inc. as of
December 31, 20x20 if the SME elects fair value method.
A. P550,000 B. P540,000 C. P570,000 D. P600,000

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