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 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
This
Unrealized gain – contra account (P300,000/10)………………………. 30,000
Gain on transfer of equipment to JK Company……………….. 30,000
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 Note:
Gain on sale of equipment…………………………………..(300,000 x60%) 180,000 J Co.
Unrealized gain – contra account…………………………(300,000 x40%) 120,000
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 Note:
J
Unrealized gain – contra account (P120,000/10)………………………. 12,000
Gain on transfer of equipment to JK Company……………….. 12,000
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
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

Fair value 420,000

Less: C arrying Value (120,000)
Indicated gain 300,000

Realized gain ( SP/FV) x Indicated gain 78,000 x 300,000

420,000 55,714

Unrealized gain 244,286

300,000

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
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.

Fair value 420,000

Less: C arrying Value (120,000)
Indicated gain 300,000

Realized gain ( SP/FV) x Indicated gain 85,200 x 300,000

420,000 60,857

Unrealized gain 239,143

300,000

Return of equity to J C ompany 4,800 (12,000 x 40%)

90,000
Selling price 85,200
90,000
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 6.

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

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