JOINT ARRANGEMENTS ANSWER KEY

Problem IV

AACompany accounts for its interest in joint operation as follows:

January 1, 20x5, Shell Company records its interest in the joint operation, the asset cash being distinguished as an
asset in a joint operation by the use of (JO):
Cash in Joint Operation (JO). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,750,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,750,000
Contribution of cash to joint operations.

On December 31, 20x5, the joint operation has used the cash to purchase various assets, obtain loans, produce
inventory and incur expenses. As a joint contributor of 50% of the cash into the joint operation, Shell Company is
entitled to 50% of all the assets, liabilities, expenses and output of the joint operation.

From the balance sheet of the joint operation, it should be noted on the following items:
Net assets of the joint operation (P12,915,000 – P5,715,000)……..P 7,200,000
Inventory…………………………………………………………………… 900,000

From the costs incurred information, it can be seen that the joint operation generated P7,200,000 worth of inventory.

If only P900,000 is still on hand in the joint operation, then P6,300,000 worth of inventory must have been
transferred to each joint operators of P3,150,000.

The eventual transfer of inventory to the joint operators, the joint operation decreases the inventory balance and also
decreases the equity contribution (net assets) of the joint operators. The contributions section of the balance sheet of
the joint operation at the end of the period, after the transfer of inventory, is as follows (refer to the balance sheet
above):
Shell Company initial contribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 6,750,000
Less: Inventory transferred. . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __3,150,000 P 3,600,000
Petron Company initial contribution . . . . . . . . . . . . . . . . . . . . . . . . . ... P6,750,000
Less: Inventory transferred. . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __3,150,000 _ 3,600,000
P 7,200,000
On December 31, 20x5, Shell Company makes the following entry in its records to replace “Cash in JO” with a
50% share of each of the accounts — assets and liabilities — in the balance sheet of the joint operation.

2. P5,805,000.
The entry also recognizes the inventory of P3,150,000 transferred to Shell Company from the joint operation.
Finished goods inventory in JO (P900,000 x 50% . . . . . . . . .. . . . . . 450,000
Work-in-Process inventory in JO (P2,925,000 x 50%). . . . . . . . . . . . . . 1,462,500
Materials inventory in JO (P450,000 x 50%). . . . . . . . . . . . . . . . . . . . . . 225,000
Heavy Machineries in JO (P6,750,000 x 50%) . . . . . . . . . . . . . . . . . . . 3,375,000
Finished goods inventory (P6,300,000 x 50%). . . . . . . . . . . . . . . . . . . . 3,150,000
Accounts payable in JO (P675,000 x 50%) . . . . . . . . . . . . . . . . . . 337,500
Accrued payroll in JO (P540,000 x 50%). . . . . . . . . . . . . . . . . . . . 270,000
Loans payable in JO (P4,500,000 x 50%). . . . . . . . . . . . . . . . . . . . . 2,250,000
Cash in JO [P6,750,000 – (P1,890,000 x 50%] . . . . . . . . . . . . . 5,805,000

Note that Shell Company’s share of cash in the joint operation is calculated by finding the difference between the
share at the beginning of the period, the initial contribution in this example, and the share at the end of the period.

Problem V
1. The joint operator, Entity A account for their interests in the joint operation as follows:
Entity X—in 20x4
 Profit or loss (construction costs) 4,800,000
Cash/Accumulated depreciation/Trade payables 4,800,000
To recognize the construction costs incurred in 20x4

Cash 8,400,000
Profit or loss (construction revenue) 8,400,000
To recognize the construction costs incurred in 20x4

Entity Y—in 20x4

Profit or loss (construction costs) 7,200,000

Cash/Accumulated depreciation/Trade payables 7,200,000
To recognize the construction costs incurred in 20x4

Cash 8,400,000
Profit or loss (construction revenue) 8,400,000
To recognize the construction costs incurred in 20x4

Problem VI
The joint operator, Entity K account for their interests in the joint operation as follows:

January 1, 20x4 (P12,000,000 / 5 = P2,400,000)

Property, plant and equipment (interest in an aircraft) 2,400,000
Cash 2,400,000
To recognize the purchase of an ownership-interest in a jointly
controlled aircraft.

In 20x4
Cash 12,000
Profit or loss (rental income) 12,000
To recognize income earned in renting to others the use of the aircraft
in 20x4.

Profit or loss (aircraft operating expenses) 180,000

Cash 180,000
To recognize the costs of running an aircraft in 20x4.

Profit or loss (depreciation expense) 120,000

Accumulated depreciation (interest in an aircraft 120,000
To recognize depreciation of an ownership-interest in a jointly
controlled aircraft in 20x4: P12,000,000/20 years = P600,000/5
operators = P120,000
share for each joint operator.

Problem VII
1. The following are the summaries of the above transactions for a joint operation in the form of a partnership:

Investment in
Event Joint Operation AA BB CC
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
a. P 12,000 P12,000
b. 120,000 120,000
6,000 P 6,000
 c. 180,000 120,000 P60,000
d. P588,000 P204,000 P312,000 P72,000
e. 3,600 3,600 3,600 10,800
6,000 6,000
f. * ________ ___3,000 ___3,000 ________ ________ ______ _______ _______
P318,000 P597,000 P210,600 P252,000 P315,600 P 60,000 P81,600 P 16,800
NI** _297,000 ________ ________ __112,200 ________ _147,000 _______ 31,800
P597,000 P597,000 P210,600 P364,200 P315,600 P195,000 P81,600 P48,600
Cash***
Settle-
ment _______ ________ _153,600 ________ ________ _120,600 _______ _33,000
Totals P597,000 P597,000 P364,200 P364,200 P315,600 P315,600 P81,600 P81,600
* purchases, P300,000; cost of goods sold, P294,000; ending inventory P6,000 x 50% = P3,000.

**NI – Net Income Allocation

AA BB CC Total
Allowance for cleaning-up operations P 3,000 P 3,000
Commission:
Aljon: 40% of P204,000 P81,600 81,600
Elerie: 40% of P312,000 P124,800 124,800
Mac: 40% of P72,000 28,800 28,800
Balance (75%: 25%) 30,600 10,200 _______ 40,800
Total P112,200 P135,000 P31,800 P279,000
**Total credits of P597,000 – Total debits of P318,000 = P279,000, net income.

2. The cash settlement entry (refer to No. 1 for the computation of settlement) would be as follows:
AA, capital 153,600
BB, capital 120,600
CC, capital 33,000

Therefore, BB will pay P120,600 and CC will pay, P33,000 to AA as final settlement for the joint operations.