LESSON 7 JOINT VENTURES (12 HOURS)

It is a contractual arrangement whereby two or more parties undertake an

economic activity which is subject to joint control.

Jointly con-trolled Jointly controlled assets Jointly con-trolled entities

operations
Involves the use of the Venturers control jointly an Involves the establishment
assets and other re-sources asset of a company, partnership or
than the establishment of an other entity in which each
entity which is separate venture has interest.
from the venturers
themselves. Venturer reports his interest
using Proportionate
Consolidation or Equity
Method.

Proportionate consolidation Equity method

The Statement of Financial Position of
venture includes its share of the net assets
of the joint venture and the income
statement includes its share of the income
and expenses of the joint venture.
Investment in Joint Venture account is
debited for the initial and additional
investments and for the venturer’s share in
profit.

Separate records No Separate records

Investment in Joint Venture Joint Venture
Original and capital withdrawals Merchandise Merchandise
additional investment from joint venture Contribution Withdrawals
purchases merchandise returns
services rendered to share in joint venture freight-in purchase return and
the venture on a losses allowance
compensatory basis
Sales return and allowances purchase discounts
share in joint venture cash settlement sales dis-counts sales
profits
expenses other income

Investments Pxx
Add:Share in venture gain Pxx
Total Pxx
Total Pxx
Less:Withdrawals Pxx
Cash settlement Pxx
 REVIEW PROBLEMS

PROBLEM 1

Sha, Jo and Le, agree to sell yellow t-shirts and visors on February 24 and 25.

Sha constructed a stand in front of Le’s house at a cost of P200 chargeable to

operations. Any profit from the venture will be distributed first by the payment
of P50 to Le to cover the cost cleaning his lot after the venture, then by
allowing a 40% commission on individual sales and finally , by dividing the
remainder be-tween Sha and Jo in the ratio of 3:1. All purchases will be
out-of-pocket and all sales activities will be the responsibility of each
individual.

On February 24, Sha purchased a merchandise worth P5,000 using P1,000

handed to him by B and P4,000 of his own money. Le paid P100 for a permit to
operate the concession.

Sha, Jo and Le made sales at a mark-up of 100% on cost, as follows: Sha –

P3,400; Jo – P5,200; and, Le – P1,200. C paid P180 for their personal meals,
which is to be shared equally by all of them.

The stand is no longer useful. The balance of the inventory was taken by Sha at
50% of cost, as agreed to by Jo and Le.

Required:

1. Joint venture profit

2. Share of Sha in the joint venture profit

3. The final cash settlement to the venturers would be:

ANSWERS AND SOLUTIONS

1. Joint venture

(200)

(5,000)

(100)

3,400

5,200

50

1,200

P4,550

2. SHA JO LE TOTAL
Services paid to Le 50 50
40% commission on 1360 2080 480 3920
sales
40% commission on 435 145 580
sales
1795 2225 530 4550

3.

Sha
200

3,400 4,000

60 1,795

50
2485

Jo
5,200 1,000

60 2,225
2035
 Le
1,200100

120

530
450

PROBLEM 2

On March 1, 2014, entities Tin and Na each acquired 30% of the ordinary
shares that carry voting rights at a general meeting of shareholders of entity
Tina for P300,000. In acquiring those shares, entity Tin incurred transaction
costs of P1,000. Entities Tin and Na immediately agreed to share control over
entity Tina.

On December 31,2014, entity Tina declared a dividend of P100,000 for the year
2013. Entity Tina report-ed a profit of P80,000 for the year ended December
31,2014. On December 31,2014, the recoverable amount of each venturer’s
investment in entity Tina is P290,000 (calculation: fair value P293,000 less costs
to sell of P3,000. There is no published price quotation for entity Tina.

Required:

1. Using cost model, at December 31,2014, entities A and B must each report
their investment in entity Tina amounted to:

2. Using the same information in 3-a, entities Tin and Na must each recognize
dividend income for the year 2014 amounted to

3. Using the same information in 3-a, each venturer recognize impairment loss
for 2014 amounted to

ANSWERS AND SOLUTIONS

1. December 31,2014, entities Tin and Na must each report their investment I
entity Tina at P290,000 (i. e., cost less accumulated impairment).

2. 30% x P100,000 entity Tina’s profit for the year. P30,000.

3. (P301,000-P290,000) On December 31, 2014 the carrying amount is reduced
to P290,000 and it’s carrying amount before impairment is P301,000.

PROBLEM 3 During the year 2014, Neila has been the manager of a joint
venture with Ferika and Lowi.It was agreed that on the completion of the
venture, Neila is to receive a fee of 10% of the venture profit after the
deduction of the fee as expense. The venture is terminated on October 31,
2014. On this date Neila’s trial balance contains the following:

The balance of the joint venture assets on hand is sold by Neila for P3,500.
Profits must be divided equally after the fee of Neila.

Required:

1. The fee of Neila is ?

2. Share of Ferika in the JV profit ?

3. The amount received by Lowi from settlement is:

ANSWERS AND SOLUTIONS

PROBLEM 3 During the year 2014, Neila has been the manager of a joint
venture with Ferika and Lowi.It was agreed that on the completion of the
venture, Neila is to receive a fee of 10% of the venture profit after the
deduction of the fee as expense. The venture is terminated on October 31,
2014. On this date Neila’s trial balance contains the following:

The balance of the joint venture assets on hand is sold by Neila for P3,500.
Profits must be divided equally after the fee of Neila.

Required:

1. The fee of Neila is

2. Share of Ferika in the JV profit

3. The amount received by Lowi from settlement is:

ANSWERS AND SOLUTIONS

1.
JV before profit 13,000
Sale of asset on hand 3,500
Profit 16,500

2.
JV before profit 13,000
Sale of asset on hand 3,500
Profit 16,500

3.
Lowi, capital before share 6,500
of profit
Share in profit 5,000
Cash settlement 11,500

PROBLEM 4

On January 2, 2014, Karen Company and Mara Company formed the Sexy
Company, a merchandising joint venture. Each invested P8,000 for a 50%
interest in the joint venture. Condensed financial statements for Karen
Company, Mara Company and for the joint venture, Sexy Company are
presented below:

Income statement:
Karen Co. Mara Co. Sexy Co.
Sales P120,000 P80,000 P40,000
Investment income 5,000 5,000 -
Total 125,000 85,000 40,000
Cost and expenses 60,000 48,000 30,000
Net income 65,000 37,000 10,000

Balance sheet:
Assets P142,000 P114,000 P80,000
Investment in Sexy Co. 13,000 13,000 -
Total assets 155,000 127,000 80,000

Liabilities P84,000 P76,000 P54,000

Capital stock 48,000 40,000 -
Retained earnings 23,000 11,000 -
Venturer’s Capital - - 26,000
Total Liabilities and Capital P155,000 P127,000 P80,000

Required:

1. Under the proportionate consolidation, how much is the total assets of

Karen co. on December 31, 2013?

2. Using the data above, the total liabilities to be reported by Mara co. under
the equity method on Dec. 31, 2013 is?

3. Using the data above, assuming Karen company used the proportionate
consolidation, how much is the investment income to be reported in its
Dec.31,2013 consolidated financial statement?

1.

Under the proportionate consolidation, the statement of financial position of

the venturers includes its share of the net assets of the joint venture.

Total assets of Rash 142,000

Share in JV assets 40,000
Total assets of Rash P182,000

2.

Under equity method, each venture records only those transactions affecting
his investment to which he is a party. Since the liabilities of Sha is a separate
transaction not affecting his investment in JV, the liabilities to be reported is
only 76,000.

3.
Under proportionate consolidation, investment income account should not
appear in the consolidated financial position.

PROBLEM 5

Norms and Max formed a joint venture on January 3, 2013 to buy and sell
certain merchandise. Their capital contributions and profit and loss ratios are
presented below:

P4,000

Expenses paid by Max:

Taxes and licenses 400
Freight on merchandise contributed by Norms 300
Delivery expense on merchandise sold 200
Sales (all of the merchandise contributed and purchased by Max and 14,000
one-half of those contributed by Max)-Selling price

The venture is terminated on Dec. 31,2014.

Required:

1. The amount of merchandise on hand?

2. What is the joint venture profit (loss) on Dec. 31,2014?

3. In the final settlement assuming the used of equity method, how much
would Norms receive assuming Norms took unsold merchandise at cost?

ANSWERS AND SOLUTIONS

1.

Mdse. Contributed by Norms 8000

Freight on mdse. Contributed norms 300
8,300
X 50%
4,150
2.

Joint Venture
 6000 14,000

4000 4,150

8000

400

300

200
750

3.

Norms’ capital
4150 5000

375 8000
8475
TEACHER’S INSIGHTs

· The two essential elements of a joint arrangement are (1) contractual arrangement
and (2) joint control by two or more parties.

· Joint control is the contractually agreed sharing of control of an arrangement

which exists only when decisions about the relevant activities require the unanimous
consent of the parties sharing control.

· An arrangement can still be considered a joint arrangement even if not all of the
parties have joint control of the arrangement.

· A party to a joint arrangement is an entity that participates in a joint arrangement,

regardless of whether that entity has joint control of the arrangement.

· A joint arrangement is either (a) joint operation or (b) joint venture.