UNIVERSITY OF MINDANAO COLLEGE OF ACCOUNTING EDUCATION
ACCOUNTING FOR JOINT ARRANGEMENTS • The rights and obligations of the parties to the arrangement can be assessed from the
Definition
• PFRS 11, paragraph 4, defines a joint arrangement as “an arrangement of which two or more
parties have joint control.”
• Paragraph 5 provides that a joint arrangement has the following characteristics:
o The parties are bound by a contractual arrangement
o The contractual arrangement gives two or more parties joint control of the
arrangement
Joint Control
• Joint control is 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
Two Types of Joint Arrangement
• PFRS 11, paragraph 6, provides that a joint arrangement is either a joint operation or a joint
venture.
o A joint operation is a joint arrangement, whereby the parties have joint control of the
arrangement have right to the assets and obligations for the liabilities relating to the
arrangement.
§ The parties to a joint operation are known as joint operators
o A 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
§ The parties to a joint venture are known as joint venturers
Joint Arrangement – A Joint Operation or a Joint Venture?
• Appendix B of PFRS 11, paragraph B14, provides that the classification of joint arrangement
depends upon the rights and obligations of the parties to the arrangement.
o When the entity has rights to the assets and obligations for the liabilities relating to
the arrangement, the joint arrangement is a joint operation
o When the entity has rights to the net assets of the arrangement, the joint
arrangement is a joint venture
ADVANCED FINANCIAL ACCOUNTING & REPORTING
COMPETENCY APPRAISAL COURSE
structure of the joint arrangement
• The joint arrangement may be structured through a separate vehicle or may not be structured
through a separate vehicle
• The “separate vehicle” is the legal entity established for purposes of the joint arrangement
• This legal entity may be a corporation, partnership or any other legal form created
independent of the parties to the arrangement
Joint Arrangement “Without a Separate Vehicle”
• Appendix B of PFRS 11, paragraph B16 provides explicitly that the joint arrangement is a joint
operation if the arrangement is structured without a separate vehicle
• Under such contractual arrangement, the rights to the assets and obligations for liabilities
relating to the arrangement are clearly established
• The contractual arrangement also establishes the rights of the parties to the corresponding
revenue and obligations of the parties for the corresponding expenses
Joint Arrangement “With a Separate Vehicle”
• Appendix B of PFRS 11, paragraph B19 provides that a joint arrangement in which the assets
and liabilities relating to the arrangement are held by a separate vehicle can be either a joint
operation or joint venture
• Paragraph B21 further provides that when the parties have structured the joint arrangement
through a separate vehicle, the rights and obligations of the parties depend on the following:
o The legal form of the separate vehicle
o The terms of the contractual arrangement
o Other relevant facts and circumstances
• The legal form of the separate vehicle is relevant when assessing the type of joint
arrangement
• For example, the legal form causes the separate vehicle to be considered in its own right and
independent of the parties
CEDRIC IAN CARLO E. PETALCORIN, CPA, MBA 1
UNIVERSITY OF MINDANAO COLLEGE OF ACCOUNTING EDUCATION COMPETENCY APPRAISAL COURSE
• The assets and liabilities held in the separate vehicle are the assets and liabilities of the o Its expenses including its share of any expenses incurred jointly
separate vehicle and not the assets and liabilities of the parties
• Paragraph 21 further provides that a joint operator shall account for the assets, liabilities,
• In such a case, the parties have only rights to the net assets of the separate vehicle revenue and expenses relating to its interest in a joint operation in accordance with PFRS
applicable to the particular assets, liabilities, revenue, and expenses
• Accordingly, the legal form of the separate vehicle indicates that the joint arrangement is a
joint venture PRACTICE PROBLEMS:

• However, the terms of the contractual arrangement agreed upon by the parties and other Problem 1 – LJ, AD, and KL formed a joint operation. They agreed to make initial contributions of
relevant facts and circumstances can override the assessment of the rights and obligations P 50,000 each. Profit or loss shall be divided equally. The following data relate to the joint
conferred upon the parties by the legal form of the separate vehicle operation’s transactions:

JOINT OPERATION Joint Operation Expenses paid from JO Cash Merchandise Inventory Taken
LJ 40,000 credit 25,000 25,000
Examples of a Joint Operation AD 50,000 credit 10,000 30,000
KL 60,000 credit 15,000 20,000
• An example of a joint operation is when parties to a joint arrangement agree to manufacture,
market and distribute jointly a particular product, such as an aircraft. Each joint operator uses REQUIRED:
its own property, plant and equipment and carries its own inventory. It also incurs its own 1. How much is the balance of joint operations account before distribution of profit or loss?
expenses and liabilities. Different parts of the manufacturing process are carried out by each 2. How much is the joint operation’s sales during the period?
joint operator. Each joint operator bears its own costs and recognizes a share of the revenue 3. How much is the joint operation’s profit or loss during the period?
from the sale of the aircraft
Problem 2 – On January 1, 2020, KK Company and DD Company signed an agreement to form a
• Another example of a joint operation is when parties agree to share and operate an asset joint operation to manufacture a product called plasma. This product is used in the manufacturing
together. A number of oil producing entities may jointly control and operate an oil pipeline. of television. To commence the operation, both operators contributed P 180,000 in cash.
In such a case, the contractual arrangement establishes the parties’ rights to the pipeline that
is operated jointly and how revenue from the asset and operating costs are shared among the REQUIRED:
parties. Each joint operator accounts for its share of the joint asset and its agreed share of 1. Prepare journal entries to record the following:
liabilities, and recognizes its share of revenue and expenses in accordance with the a. Contributions of cash by the operators
contractual arrangement b. Use of cash and loan to buy machinery and equipment costing P 96,000 (cash paid, P
60,000 and the balance on a loan account) and raw materials purchase on account
Accounting for Joint Operation costing P 78,000
c. Labor incurrence amounting to P 86,400 with P 84,000 paid in cash
• PFRS 11, paragraph 20, provides that a joint operator shall recognize in relation to its interest d. Loans from the bank, P 72,000
in a joint operation: e. Repayment of loan – machinery and equipment, P 12,000, raw materials amounting
o Its assets, including its share of any assets held jointly to P 50,400 and other factory expenses, of P 156,000
o Its liabilities, including its share of any liabilities incurred jointly f. Depreciation of machinery and equipment P 9,600
o Its revenue from the sale of its share of the output arising from the joint operation g. Transfer of materials, labor and overhead to Work-in-Process: payroll, P 86,400;
o Its share of the revenue from the sale of the output by the joint operation Materials, P 57,600; Factory overhead – net, light and power, P 156,000 and
depreciation of P 9,600

ADVANCED FINANCIAL ACCOUNTING & REPORTING CEDRIC IAN CARLO E. PETALCORIN, CPA, MBA 2
UNIVERSITY OF MINDANAO COLLEGE OF ACCOUNTING EDUCATION
h. Transfer of Work-in-Process to Finished Goods Inventory, P 216,000
i. Transfer of Finished Goods Inventory, P 192,000 to Joint Operators throughout the
year
2. Determine the ending balances of:
a. Cash
b. Work-in-Process
c. KK and DD Capital Balances
JOINT VENTURE
Examples of a Joint Venture
• The parties agreed to structure a joint arrangement through an incorporated entity. In other
words, the parties established a corporation in which each party has an equity interest. The
entity operates in the same way as other entities, except that a contractual arrangement
between and among the joint venturers establishes joint control over the economic activities
of the entity. The entity controls its assets, incurs liabilities and expenses and earns income.
The entity may enter into contracts in its own name and raises finance for purposes of the
arrangement. In such a case, the legal form of the incorporated entity clearly indicates that
the parties have rights only to the net assets of the entity. Thus, this joint arrangement is a
joint venture
Method of Accounting for Investment in Joint Venture
• PAS 28, paragraph 2, explicitly madates that investment in joint venture shall be accounted
for using the equity method of accounting.
o This is the same equity method used in accounting for an investment in associate
• However, Paragraph 18 provides that when an investment in joint venture is held by or is held
indirectly through an entity that is a venture capital organization, mutual trust fund, unit trust
and similar entities including insurance-linked fund, the entity may elect to measure the
investment in joint venture at fair value through profit or loss.
Accounting for an Investment in Associate becoming an Investment in Joint Venture or Vice-
Versa
• PAS 28, paragraph 24, provides that if an investment in associate becomes an investment in
joint venture or an investment in joint venture becomes an investment in associate, the entity
shall continue to apply the equity method and does not remeasure the retained interest.
ADVANCED FINANCIAL ACCOUNTING & REPORTING
COMPETENCY APPRAISAL COURSE
PRACTICE PROBLEM:
Problem 1 – GSW owns 20% in JV Inc. and uses the equity method to account for its interest in
the joint venture. GSW has joint control over the JV Inc. In 2019, GSW sold inventory to JV Inc. for
P 100,000 with a 50% gross profit on the transaction. The inventory remains unsold during 2019
and was only sold by JV Inc. to external parties only in 2020. GSW’s income tax rate is 30%.
Assuming JV Inc. reports profit of P 1,000,000 and P 1,500,000 on December 31, 2019 and 2020,
respectively:
REQUIRED:
1. What is the share in profit of JV Inc. before adjustment for 2019 and 2020?
2. How much is the unrealized profit from the downstream sale net of tax for 2019 and 2020?
3. How much is the realized profit from downstream sale net of tax for 2019 and 2020?
4. How much is the adjusted share in profit of the JV Inc. for 2019 and 2020?
Problem 2 – NOLA owns 20% in a joint venture and uses the equity method to account for its
interest in the joint venture. NOLA has joint control over the joint venture. In 2019, the joint
venture sold inventory to NOLA for P 100,000 with a 50% gross profit on the transaction. The
inventory remains unsold during 2019 and was only sold by NOLA to external parties only in 2020.
NOLA’s income tax rate is 30%. Assuming Joint Venture reports profit of P 1,200,000 and P
1,800,000 on December 31, 2019 and 2020, respectively:
REQUIRED:
1. What is the share in the profit of joint venture before adjustment for 2019 and 2020?
2. How much is the unrealized profit from upstream sale net of tax for 2019 and 2020?
3. How much is the adjusted share in profit of the joint venture in 2019 and 2020?
EXERCISES:
1. Fox Corporation purchased 25 percent of Down Company’s stock in January 1, 2020 for P
600,000. At the acquisition date, Down has equipment with a market value of P 250,000
greater than book value. On that date, Fox Corporation gives the ability to have joint control
with another entity over Down Company. The equipment has an estimated remaining life of
10 years. In 2020, Down has net income of P 320,000 and pays P 80,000 of dividends. What is
the balance in the investment account on Fox’s financial records at the end of 2020?
2. Ranto and Santo formed a joint operation to acquire and sell a special type of merchandise
Ranto is to manage the operation and to furnish the capital. The participants are to share
equally any gain or loss on the joint operation. On April 1, 2020, Santo sent Ranto P 10,000
cash, which was all used to purchase merchandise. Ranto paid freight of P 260 on the
CEDRIC IAN CARLO E. PETALCORIN, CPA, MBA 3
UNIVERSITY OF MINDANAO COLLEGE OF ACCOUNTING EDUCATION COMPETENCY APPRAISAL COURSE
merchandise purchased. On April 27, one half of the merchandise was sold for P 7,200 cash. 6. OO, PP, and QQ formed a joint operation to bankroll a series of cultural shows for the
Ranto paid the cost of delivering merchandise to customers which amounted to P 240. No Philippine Centennial celebration. OO and PP agreed to contribute cash and QQ was to
further transactions occurred until the end of the month. The profit (loss) of the operation for manage the affairs of the joint operation. QQ was to receive a bonus of 25% of the net income
the month of April, 2011 is: before bonus, OO and PP were to be allowed interest on their capital contributions at 6% per
annum, and any remainder was to be divided equally among the three partners. After a year,
3. MM and RR agreed on a joint operation to purchase and sell car accessories. They agreed to the joint operation was terminated and the following information was provided: original
contribute P 25,000 each to be used in purchasing the merchandise, share equally in any gain capital contributions used to purchase tickets, were P 1,815,000 and P 2,475,000, respectively,
or loss, and record their operation transactions in their individual books. After one year, they from OO and PP; QQ sold tickets worth a total of P 6,600,000; and QQ paid expenses of P
decided to terminate the operation, and data from their records were: Joint operation 1,899,150 out of joint operation funds. How much was the joint operation’s net income after
account credit balances: in books of MM, P 18,000; in books of RR, P 20,200, cost of car the bonus to QQ?
accessories taken: by MM, P 1,850; by RR, P 2,600, expenses paid: by MM, P 1,800; by RR, P
1,000. How much was the joint operation’s sales? 7. On September 30, 2019 R, S, and T agreed on a joint operation to sell their common stock
shares of the Golden Copper Mines. Gains and losses are to be shared in proportion to the
4. Reyes, Silva and Tan formed a joint operation. Reyes was designated as the manager and was contributed shares. R contributes 6,000 shares, which had cost him P 42 a share; S gave 10,000
to record the joint operation’s transactions in his own books. As manager, Reyes was to be shares, which had cost P 58 each and T 4,000 shares which had cost P 62 per share. The par
allowed a salary of P 10,500; the remaining profit or loss was to be divided equally. The value of the shares was P 40 and when the operation began market value was P 50 a share.
following balances appeared at the end of 2020, before adjustment for operation inventory On October 20 he sold 4,500 shares for P 44 a share and P 3,000 expenses incurred. On
and profit: November 1, Golden Copper distributed a stock dividend of 20%. T sold 5,000 shares, ex-stock
Debit Credit dividend, on November 5 for P 25 a share. On November 15, Golden Copper paid a cash
Joint operation cash P 48,000 P - dividend of P 1 per share. On November 22, he sold 6,000 shares for P 28. On December 20,
Joint operation - 15,000 the remainder of the shares were sold for P 35 a share. T’s expenses were P 4,700. The 20,000
Silva, capital 1,000 - shares contributed to the operation should be valued at:
Tan, capital - 27,000

The operation was terminated on December 31, 2020 and unsold merchandise costing P “We can always kind of be average and do what’s normal. I’m not in this to do what’s
12,000 were taken over by Tan. Reyes made cash settlement with Silva and Tan. In the final normal.” – Kobe Bryant, 1978-2020
cash settlement, how much did Tan receive?

5. V, I and P form a joint operation for the sale merchandise. P is to contribute the merchandise,
while V is to act as the manager and I to be allowed a bonus of 25% of the profit after
deduction of the bonus as expense. I and P are to be allowed 6% interest a year on their
original investments. The balance of the profit on the operation is to be divided equally among
the three participants. On July 1, 2020, I and P contributed merchandise of P 66,000 and P
90,000, respectively. For the period between July 1 and October 1, V sold operation
merchandise on account for P 240,000, of which he collected P 229,500, allowed sales
discounts of P 4,050, and wrote off P 6,450 as uncollectible. V paid joint operation expenses
of P 58,560 from the operation cash. On October 1, the joint operation was terminated and
unsold merchandise was returned at the following values: to I, P 15,000, and to P, P 11,400.
Cash settlement was completed by V on the same day. The cash settlement received by I and
P, respectively are

ADVANCED FINANCIAL ACCOUNTING & REPORTING CEDRIC IAN CARLO E. PETALCORIN, CPA, MBA 4