108

UNIT V – JOINT ARRANGEMENTS

Definition of terms:
Joint arrangements - PFRS 11 – an arrangement of which two or more parties have joint control.
Joint control - a contractually agreed sharing of control of an arrangement, which exist only when decision
a relevant activities require the unanimous consent of the parties sharing control. (PFRS 11)

Joint operation – a joint arrangement whereby the parties that have joint control over the arrangement have rights
to the assets and obligations for liabilities relating to the arrangements.

Joint venture – a joint arrangement whereby the parties that have joint control of the arrangement have right to the
net assets of the arrangement.

Joint venturer - a party to a joint venture that has joint control of the joint venture.

Party to a joint venture arrangement - an entity that participates in joint arrangement regardless of whether that
entity has joint control of the arrangement.

Separate vehicle – a separate identifiable financial structure, including separate legal entities or entities
recognized by statue, regardless of whether those entities have a legal personality.

Characteristics of joint arrangement:

1. Parties are bound by contractual arrangement

Contractual arrangement -
 establishes joint control over the joint arrangement
 ensures that no single party is in position to control the activity unilaterally.

2. The arrangement gives two or more parties joint control of the arrangement.
Joint control -
 a contractually agreed sharing of control of an arrangement, which exist only when decision about a
relevant activities require the unanimous consent of the parties sharing control. (PFRS 11)
 exists when all the parties sharing joint control over arrangement act collectively (or together) in
directing the activities that significantly affect the returns of the arrangement.

Types of Joint arrangements

1. Joint operation

a. There is joint arrangement and joint control

b. Parties have the rights to the assets and obligation for liabilities relating the arrangement.
c. There is no separate vehicle
d. If there is separate vehicle and the arrangement confers the party – right to all economic benefit and
assume all obligations.
e. Parties are called joint operators

2. Joint venture

a. There is contractual arrangement and joint control

b. Parties have the rights to the net assets of the arrangement
c. If there is a separate vehicle and the arrangement confers the party – right to the net assets of the
vehicle.
d. Parties are called joint venturers.
 109

Example: ( Source: Accounting for Special Transactions by Zeus Vernon B. Milan)

A and B entered into a joint agreement to form Alphabets Corporation which shall manufacture materials
required by A and B for their own, individual manufacturing processes. The arrangement ensures that the parties
operate the facility that produces the materials to the quantity and quality specifications of the parties.

Each party shall have 50% ownership interest in Alphabets Corporation. Alphabets shall have its own assets,
incurs its own obligations, generates its own income and incurs its own expenses.

Case 1 : (adapted from PFRS 11.B32)

It was agreed further that:
1. A and B shall purchase all the output produced by Alphabets Corporation in the ratio of 50:50. Alphabets
cannot sell any of its output to third parties unless this is approved by A and B.
2. The price of the output sold to the parties is set by both parties at a level that is designed to cover the costs
of production and administrative expenses incurred by Alphabets Corporation. On the basis of this
operating model , the arrangement is intended to operate at a break even level.

The arrangement is a joint operation.

Analysis:
1. The obligation of the parties to purchase all of the output produced by Alphabets Corporation reflects the
exclusive dependence of Alphabets upon the parties for the generation of cash flows. Therefore, the
parties have an obligation to fund the settlement of the liabilities of Alphabets Corporation.
2. The fact that the parties have rights to all of the output produced by Alphabets Corporation means that the
parties are consuming and therefore have rights to all the economic benefits of the assets of Alphabets.

Case 2: (adapted from PFRS 11.B32)

If the parties changed the terms of the contractual arrangement so that Alphabets Corporation was able to
sell output to third parties, this would result in Alphabets Corporation assuming demand, inventory and credit
risk.

The arrangement is a joint venture.

Financial Statements of parties to a joint arrangement

a. Joint operations -

 Joint operator recognizes its own asset, liability, revenue and expense and its share in the joint
operation’s assets, liabilities, income and expenses. The operator shall report the following:

Asset Own asset held Share of any asset 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 the operator and joint operations:

Any gain or loss in the contribution of asset shall be recognized by the operator to the extent of the
interest of the party. There is a gain or loss because the contributor-operator carries the assets
contributed at book value while the other operators recognize the said asset as fair value. The
difference in valuation of assets results to gain or loss

 A joint operator accounts for the assets, liabilities, revenue and expenses relating to tis involvement in
a joint operation in accordance with the related PFRS.

 A party that participates in, but does not have a joint control of a joint operation shall also account for its
interest in the arrangement in accordance with the above if the party has rights to the assets and
obligations for the liabilities, relating to the joint operation.
 110

Illustration 1 ( Source: Accounting for Special Transactions by Zeus Vernon B. Milan)

Entity A and B agreed to contribute resources to construct an oil pipeline that each will use to transport
its own oil. In return the joint operator agreed to share equally the acquisition cost and operating costs of
the pipeline. The acquisition costs of the pipeline was P 100M while the operating expense totaled P 30M.
Entity A had total sales of P 120M while Entity B had total sales of P 150M.

The individual financial statement of the entities will show:

Entity A Entity B
Statement of Financial Position: Statement of Financial Position:
PPE (oil pipeline) 110M x 50% 50M PPE (oil pipeline) 100M x 50% 50M

Statement of Profit or loss: Statement of Profit or loss:

Sales 120M Sales 150M
Expenses ( 30M x 50%) ( 15M) Expenses ( 30M x 50%) ( 15M)
Profit 105 M Profit 135 M

b. Joint Venture

 A joint venture recognizes its interest in a joint venture as an investment and shall account for that
investment using the equity method in accordance with PAS 28 Investment in Association and Joint
Ventures unless the entity is exempted from applying the equity method as specified in that standards.

 A party that participates in, but does not have joint control of a joint venture accounts for its interest in
the arrangement in accordance with PFRS 9 Financial Instruments unless it has significant influence
over the joint venture, in which case it accounts for it in accordance with PAS 28.

Statement of Financial Position:

Investment in Joint Venture account is presented as non-current assets.

Investment in Joint Venture

Initial investment Dividend received
Share in profit Share in losses
Share in other comprehensive income

Accounting for Joint Operations – Partnership in nature

It involves the computation of the following data:

1. Joint venture profit or loss
a. Completed joint venture
b. Uncompleted joint venture
2. Cash settlement to participants

 Joint venture profit or loss

The Joint Venture account is debited for all costs and expenses and is credited for all income
recognized. The following should be considered in computing profit or loss:

a. Completed joint venture

The balance of the Joint Venture account represents the profit or loss. A credit balance represents
profit and a debit balance represents loss.
 111

b. Uncompleted joint venture

There are still unsold merchandise, the profit or loss is the squeeze figure between the balance of
the Joint Venture account and profit distribution and the cost of unsold merchandise, (the required
debit balance of the Joint Venture account after profit or loss distribution).

 Cash settlement

This is the cash due from the participant upon completion of the joint venture. The following should be
observed:

a. The participants’ balances shall be determined

b. If there is a credit balance in the participants’ account, he shall receive cash equal to his credit
balance.
c. If there is a debit balance in the participants’ account, he shall pay cash equal to the debit balance.

 The following should be considered in accounting for joint operation:

1. No separate set of books are maintained for the joint operation

2. Separate set of books are maintained for the joint operations.

No separate set of books are maintained for the joint operation

a. Each joint operator shall use his regular books to record the joint operation transactions.
b. Each joint operator shall establish a Joint Operation account and personal account ( receivable
or payable) of other joint operators in his books. These accounts shall be included in the regular
accounts of the joint operator.
c. In the books of the joint operator who acts as manager, any cash he received in relation to the
joint operation should be recorded as “Joint Operation – Cash” in his own books.

Joint Operation
Merchandise contribution Merchandise withdrawal
Purchases and freight in Purchase returns, allowances & discount
Sales returns, allowances & discount Sales and other items of income
Expenses paid by operator Merchandise inventory, end
Debit balance = loss Credit balance = profit

Separate set of books are maintained for the joint operations.

a. Separate records of the joint operation shall be kept by the joint operator appointed as manager.
b. Joint operations transactions are recorded in the separate records in the regular manner similar
to ordinary business.
c. Each joint operator establishes an “ Interest in Joint Operation” account which will be used to
record his investment, withdrawals and share in profit or losses of the operation.

Interest in Joint Venture

Contribution and investment Sales and other income received
Cost & expenses paid for joint operation Withdrawals of contribution
Share in profit Share in losses

Debit balance means receivable while credit balance means payable during the cash
settlement of joint operation.
 112

Illustrative problem 1: ( Source: Accounting for Special Transactions by Zeus Vernon B. Milan)

1. A, B and C agreed to form a joint operation. Profit and loss of the joint operation shall be divided equally.
The following were the transactions during the year:

a. Inventory costing P 100,000 was sent by A to B.

b. Freight paid by A on the inventories sent to B, P 5,000.
c. Cash of P 200,000 was sent by C to B to be used to purchase additional inventory.
d. B purchased additional inventory amounting to P 250,000, P 50,000 of which were made on account of
B.
e. Cash sales made by B amounted to P 550,000.
f. Operating expenses amounting to P 45,000 were paid by B using his own cash.
g. Unsold inventory at year end amounted to P 30,000

REQUIRED: Journal entries in the books of joint operators assuming no separate books is maintained for the
joint operations.

Books of A Books ob B Books of C

a. Joint Operation 100,000 Joint Operation 100,000 Joint operation 100,000
Inventory 100,000 Payable to A 100,000 Payable to A 100,000
A’s investment A’s investment A, investment

b) Joint operation 5,000 Joint operation 5,000 Joint operation 5,000

Cash 5,000 Payable to A 5,000 Payable to A 5,000
Freight paid by A Freight paid by A Freight paid by A

c) Joint operation 200,000 JO- Cash 200,000 Joint operation 200,000

Payable to C 200,000 Payable to C 200,000 Cash 200,000
C’ investment C’ investment C’ investment

d) Joint operation 50,000 Joint operation 250,000 Joint operation 50,000

Payable to B 50,000 JO – Cash 200,000 Payable to B 50,000
B’s contribution Accounts payable 50,000 B’s contribution
Purchases

e) Receivable from B 550,000 JO – Cash 550,000 Receivable from B 550,000

Joint operation 550,000 Joint operation 550,000 Joint operation 550,000
Sales Sales sales

f) Joint operation 45,000 Joint Operation 45,000 Joint operation 45,000

Payable to B 45,000 Cash 45,000 Payable to B 45,000
JO expenses paid by B JO operating expenses JO expenses paid by B.

g) Joint operation 180,000 Joint Operation 180,000 Joint Operation 180,000

Share in JO profit 60,000 Share in JO profit 60,000 Share in JO profit 60,000
Payable to B 60,000 Payable to A 60,000 Payable to A 60,000
Payable to C 60,000 Payable to C 60,000 Payable to B 60,000

To determine Joint Operation profit or loss:

Joint Operation
a) 100,000 e) 550,000
b) 5,000
c) 200,000 Inventory end 30,000
d) 50,000
f) 45,000 ______
4050000 580,000
Credit balance 180,000 profit
 113

2. Assume that the joint operation is to be liquidated and C is charged of the unsold inventory, the
journal entries to record cash settlement among the joint operators:

Books of A Books ob B Books of C

h) Payable to C 30,000 Payable to C 30,000 Inventory 30,000
Joint operation 30,000 Joint operation 30,000 Joint operation 30,000
Inventory charged to C Inventory charged to C Inventory received from
Joint operation.

i) Cash 165,000 Cash 155,000 Cash 230,000

Payable to B 155,000 Payable to A 165,000 Payable to A 165,000
Payable to C 230,000 Payable to C 230,000 Payable to B 155,000
Receivable from B 550,000 JO- Cash 550,000 Receivable from B 550,000
Cash settlement Cash settlement Cash settlement

The general ledger of each joint operator will show the following:

GENERAL LEDGER

Books of A Books of B Books of C

Joint Operation Joint Operation Joint Operation

a 100,000 e) 550,000 a) 100,000 e) 550,000 a) 100,000 e) 550,000
b) 5,000 h) 30,000 b) 5,000 h) 30,000 b) 5,000 h) 30,000
c) 200,000 d) 250,000 c) 200,000
d) 50,000 f) 45,000 d) 50,000
f) 45,000 g) 180,000 f) 45,000
g) 180,000 ______ _______ _______ g) 180,000 ______
580,000 580,000 580,000 580,000 580,000 580,000

Payable to B Payable to A Payable to A

i) 155,000 d) 50,000 i) 165,000 a) 100,000 i) 165,000 a) 100,000
f) 45,000 b) 5,000 b) 5,000
g) 60,000 g) 60,000 g) 60,000
155,000 165,000 165,000

Payable to C Payable to C Payable to B

h) 30,000 c) 200,000 h) 30,000 c) 200,000 i) 155,000 d) 50,000
______ g) 60,000 ______ g) 60,000 f) 45,000
30,000 260,000 30,000 260,000 g) 60,000
i) 230,000 Bal 230,000 i) 230,000 Bal 230,000 155,000

Receivable from B JO – Cash Receivable from B

e) 550,000 i) 550,000 e) 550,000 i) 550,000 e) 550,000 i) 550,000

Share in JO profit Share in JO profit Share in JO profit

g) 60,000 g) 60,000 g) 60,000
 114

Separate books for Joint Operation

Illustrative problem 2: ( Source: Accounting for Special Transactions by Zeus Vernon B. Milan)
Using the same data as in Problem 1, except that the joint operation will use separate books: the journal entires:

Books of Joint Operation

a. Inventory 100,000 g) Inventory, end 30,000

A, capital 100,000 Sales 550,000
A’s investment Inventory, beg. 100,000
Freight in 5,000
b) Freight in 5,000 Purchases 250,000
A, capital 5,000 Expenses 45,000
Freight paid by A Income summary 180,000
To close nominal accounts
c) Cash 200,000
C, capital 200,000 h) Income summary 180,000
C’ investment A, capital 60,000
B, capital 60,000
d) Purchases 250,000 C, capital 60,000
Cash 200,000 Distribution of net income.
B, capital 50,000
Purchases of merchandise i) C, capital 30,000
Inventory, end 30,000
Inventory received by C.
e) Cash 550,000
Sales 550,000 j) A, capital 165,000
Sales B, capital 155,000
C, capital 230,000
f) Expenses 45,000 Cash 550,000
B, capital 45,000 Cash settlement
JO expenses paid by B

Books of A Books of B Bfooks of C

a. Interest in JO 100,000 No entry No entry
Inventory 100,000
A’s investment

b) Interest in JO 5,000 No entry No entry

Cash 5,000
Freight paid by A

c) Interest in JO 200,000
Cash 200,000
C’ investment

d) Interest in JO 50,000
Accounts payable 50,000
Investment in JO

g) Interest in JO 60,000 Interest in JO 60,000 Interest in JO 60,000

Share in JO profit 60,000 Share in JO profit 60,000 Share in JO profit 60,000
Share in profit Share in profit Share in profit

h) Inventory 30,000
Interest in JO 30,000
Inventory received from JO

i) Cash 60,000 Cash 60,000 Cash 60,000

Interest in JO 60,000 Interest in JO 60,000 Interest in JO 60,000
Cash settlement Cash settlement Cash settlement
 115

ACCOUNTING FOR JOINT VENTURE:

Illustrative Problem:

On January 1, 2020 ADDI Company entered into a joint agreement classified as joint venture. For the
investment of P 500,000, Addi Company obtained 40% interest in Joint Venture, Incorporated. During the year,
Joint Venture, Inc. reported net profit of P 1,000,000 and other comprehensive income of P 500,000 for a
total of other comprehensive income of P 1,500,000. Joint Venture, Inc. declared and paid dividends of
P 600,000 during the year.

Required: Prepare the necessary journal entries in the books of ADDI Company (joint venture)

Solution: Books of ADDI Company (joint venture) Equity Method

Debit Credit
2020
Jan. 1 Investment in Joint Venture 500,000
Cash 500,000
investment

Dec. 31 Investment in Joint Venture 600,000

Share in the profit of JV 400,000
Share in OCI 200,000
Share in profit and OCI

Cash 240,000
Investment in Joint Venture 240,000
Dividend received

Q1: How much is the carrying amount of the Investment in Joint Venture as of December 31, 2020?

P 860,000 ( 500,000 + 600,000 – 240,000)

Note: the journal entries in the books of the Joint Venture are similar to the journal entries in the Books of
Joint operation if the joint operation kept a separate set of books.

PFRS FOR SMES – JOINT VENTURE/JOINT ARRANGEMENT

Joint venture as defined in Sec, 15 of PFRS for SME , Investment in Joint ventures:
 Is a contractual arrangement whereby two or more parties undertake an economic activity that is
subject to joint control.

Joint control – is the contractually agreed sharing of control over an economic activity that exists only when the
strategic financial and operating decisions relating to the activity require the unanimous consent of the
parties sharing control (the venturers).

Note: In determining whether 2 or more entities jointly controlled another company – an entity should
consider the existence and effect of currently exercisable potential voting right that it holds.

Forms of Joint venture:

1. Joint controlled operations
2. Jointly controlled assets
3. Jointly controlled entities
 116

Jointly controlled operations –

a. The operation of the joint venture involves the use of assets other resources of the venturers rather than
the establishment of a separate entity.
b. Each venture uses its own assets and incurs its own liabilities and expenses.
c. Revenue from sale of joint venture’s product and any expenses incurred in common are share among the
venturers.
d. The joint venture’s activities may be carried out by the venturer’s employees alongside the venturer’s
similar activities.
e. Accounting procedures:
In respect of its interests in jointly controlled operations, a venture shall recognize in its financial
statement:
1. The assets that it controls and the liabilities that it incurs, and
2. The expenses that it incurs and its share of the net income that it earns from the sale of goods or
services by the joint venture.

Illustration ( Source: Advanced Accounting Vol. 1 by Guerrero, P.P and Peralta, J.F)
Two construction companies , Co. X and Co. Y form a joint venture to participate in a bidding to construct a
bridge connecting two cities for the government. After the bidding process , the government awarded the
contract jointly to Co. X and Co. Y.

In accordance with the contractual arrangement, Co. X and Co. Y are jointly contracted with the
government for the construction and delivery of the bridge for a bid price of P 20 million ( a fixed price
contract).

In 2020, in accordance with the agreement between co. x and Co. Y:

a. Companies X and Y used their own equipment and employees in the construction activity.
b. Company X incurred construction costs and expenses totaling P 9 million out of which P 7 million was
paid in cash and the balance evidenced by a promissory note.
c. Company Y incurred construction costs and expenses amounting to P 7 million.
d. The bridge was completed and delivered to the government. Companies X and Y shared 60:40,
respectively.

REQUIRED: journal entries in the books of Co. X and Co. Y.

Books of Co. X Books of Co. Y

b Construction costs 9,000,000 c) Construction costs 7,000,000
Cash 7,000,000 Cash 7,000,000
Notes payable 2,000,000 Construction costs & expenses incurred.
Construction costs & expenses incurred

d) Cash 12,000,000 d) Cash 8,000,000

Construction revenue 12,000,000 Construction revenue 8,000,000
Revenue earned Revenue earned

Note: Co. X and Co. Y retained control of their assets they use to perform the contract and they are responsible
for their respective liabilities. They also recognize income and expenses associated with the project.

Jointly controlled assets

 The operation of the joint venture involves a joint control and often the joint ownership by the venturers
of one or more assets contributed to or acquired for the purpose of, the joint venture and dedicated
for the purpose of the joint venture rather than the establishment of a separate entity.

 Accounting procedure:
In respect of its interests in jointly controlled assets, a venture shall recognize in its financial statement:
a. Its share of the jointly controlled assets, classified according to the nature of the assets;
b. Any liabilities that it has incurred.
c. Its share of any liabilities incurred jointly with the other venturers in relation to the joint venture,
d. Any income from the sale or use of its share of the output of the joint venture, together with its
share of any expenses incurred by the joint venture, and
e. Any expense that it has incurred in respect of its interest in the joint venture
 117

Illustration ( Source: Advanced Accounting Vol. 1 by Guerrero, P.P and Peralta, J.F)
On January 2, 2020, entities A, B and C (the venturers) jointly buy a helicopter for P 150 million cash. The
venturers are the registered owners of the helicopter. The contractual agreement of the venturers are:
a. The helicopter is at disposal of each venture for 70 days each year.
b. The helicopter is in maintenance for the remaining days each year.
c. The venturers may decide to use the helicopter or lease it to third party.
d. Maintenance and disposal of the helicopter require the unanimous consent of the venturers.
e. The expected life of the helicopter is 20 years with a residual value of P 10 million.

Summary of the transactions during 2020 are as follows:

1. The venturers each paid P 200,000 to meet the joint costs of maintaining the helicopter (e.g. hangar
rental and aviation license fees).
2. Each venture also incurred costs of running the helicopter for their personal use. Entity A incurred costs of
P 80,000 in pilot fees and aviation fuel.
3. Entity A earned rental income of P 250,000by renting the helicopter to others.

REQUIRED: journal entries in the books of entities A, B and C.

Solution:
Books of A Books of B Bfooks of C
a) Property, Plant & Equip. 50M Property, Plant & Equip. 50M Property, Plant & Equip. 50M
Cash 50M Cash 50M Cash 50M
Purchase of ownership interest Purchase of ownership- Purchase of ownership-
In a jointly controlled helicopter interest ina jointly controlled interest na jointly controlled
helicopter helicopter

b) Operating expenses 280,000 Operating expenses 200,000 Operating expenses 200,000

Cash 280,000 Cash 200,000 Cash 200,000
Cost of running the helicopter Cost of running helicopter Cost of running helicopter

c) Cash 250,000
Rental income 250,000
Revenue earned

Jointly Controlled Entities

 A joint venture that involves establishment of a separate entity ( may be a corporation, partnership ot
other entity) in which each venture has interest.
 The entity operates in the same way as other entities except the contractual arrangement between the
venturers established joint control over the economic activity of the entity.
 The entity controls the asset of the joint venture, incurs liabilities and expenses and earns income.
 It may enter into contracts in its own name and raise finance for the purpose of the joint venture
activity.

 The venture shall account for all of its interest using one of the following:
a. Cost model
b. Equity method
c. Fair value method

Accounting Procedures:
a. Cost model
 the venture shall:
1. measure its investment at cost (including transaction cost) less accumulated impairment losses.
If there is a published price quotation, the venture shall measure its investment using the fair
value model.
2. Recognize distribution received from its investment income without regard whether the
distributions are from accumulated profit of the jointly controlled entity arising before or after the
date of acquisition.
 118

Illustration ( Source: Advanced Accounting Vol. 1 by Guerrero, P.P and Peralta, J.F)

Case 1:

On January 1, 2020, entities X and Y each acquired 30% of the ordinary shares of entity A for
P500,000 plus transaction cost of P 5,000. X and Y immediately agreed to share control over Entity A.
For the year ended December 31, 2020 entity A recognized a profit of P 100,000.

On December 31, 2020, entity A declared and paid a dividend of P 50,000for the year 2020. At
December 31, 2020 the fair value of each venturers’ investment in entity A is P 520,000. There is no
published price quotation for entity A.

REQUIRIED: Journal entries in the books of entities X and Y.

Journal entries
2020 Books of X Books of Y
Jan. 1 Investment in entity A 505,000 Investment in entity A 505,000
Cash 505,000 Cash 505,000
Investment in JCE Investment in JCE

Dec.31 Cash 15,000 Cash 15,000

Dividend income 15,000 Dividend income 15,000
Dividend received Dividend received

Note: At December 31, 2020, the Investment in Entity A account to reported by X and Y shall be
P 505,000, at cost. There is no impairment loss because the fair value is P 520,000 which is
greater than the cost.

Case 2:

Assume the same facts in case 1, except that on January 2, 2020, Entity A declared a dividend of
P 80,000 for the year 2019 and at December 31, 2020 the fair value of each venture’s investment in
Entity A is P 550,000.

The journal entries in the books of A and Y:

2020 Books of X Books of Y
Jan. 1 Investment in entity A 505,000 Investment in entity A 505,000
Cash 505,000 Cash 505,000
Investment in JCE Investment in JCE

Jan. 2 Cash 24000 Cash 24,000

Dividend income 24,000 Dividend income 24,000
Dividend received Dividend received

Dec.31 Cash 15,000 Cash 15,000

Dividend income 15,000 Dividend income 15,000
Dividend received Dividend received

Note: 1. the dividend received on January 2, 2020 from 2019 income shall be recognized as income without
regard whether it was from the earnings before the acquisition of interest on January 1, 2020.

2. the Investment in Entity A account shall be reported at cost, P 505,000., there is no impairment
loss because the fair value exceeds the cost.
 119

Case 3:

Assume the same facts as in case 1, except that the on December 31, 2020 the fair value of each
venturers’ investment in entity A is P 490,000. There is no published price quotation for entity A.

2020 Books of X Books of Y

Dec.31 Impairment loss 10,000 Impairment loss 10,000
Investment in Entity A 10,000 Investment in Entity A 10,000
Impairment loss Impairment loss

Note: there is an impairment loss of P 10,000. The Investment in Entity A account shall be reported at
P 490,000

Case 4:

Assume the same facts in case 1, except that in this case there is a published quotation for Entity A.

 the Investment in Entity A account shall be reported at fair value, P 520,000, because there is a
published price. The increase in value of P 20,000 shall be recognized in the profit or loss for the year
ended December 31, 2020.

b. Equity method

 The investment is initially recognize at the transaction price ( including transaction costs) adjusted
thereafter for the post acquisition change in the venture ‘s share of profit or loss and other
comprehensive income of joint venture

Illustration ( Source: Advanced Accounting Vol. 1 by Guerrero, P.P and Peralta, J.F)

Case 1:

On January 1, 2020, entities X and Y each acquired 30% of the ordinary shares of entity A for
P300,000 plus transaction cost of P 3,000. X and Y immediately agreed to share control over Entity A.
For the year ended December 31, 2020 entity A recognized a profit of P 400,000.

On December 31, 2020, entity A declared and paid a dividend of P 150,000for the year 2020. At
December 31, 2020 the fair value of each venturers’ investment in entity A is P 425,000.

REQUIRIED: Journal entries in the books of entities X and Y.

Journal Entries:
2020 Books of X Books of Y
Jan. 1 Investment in entity A 303,000 Investment in entity A 303,000
Cash 303,000 Cash 303,000
Investment in JCE Investment in JCE

Dec.31 Cash 45,000 Cash 45,000

Investment in Entity A 45,000 Investment in Entity A 45,000
Dividend received Dividend received

Investment in Entity A 120,000 Investment in Entity A 120,000

Investment income 120,000 Investment income 120,000

Note: the Investment in Entity A account in each of the venturer’s books shall be reported at.
P 378,000 ( 303,000 – 45,000 + 120,000). There is no impairment loss because fair value is
greater than the carrying amount of investment ( 425,000 exceeds 378,000).
 120

Case 2:

On January 1, 2020, entities X and Y each acquired 30% of the ordinary shares of entity A for
P300,000 plus transaction cost of P 3,000. X and Y immediately agreed to share control over Entity A.

For the year ended December 31, 2020 entity A incurred a loss of P 100,000 and it did not declare
dividend. At December 31, 2020 the fair value of each venturer’s investment in entity A is P 275,000
and estimated cost to sell is P 10,000.

REQUIRIED: Journal entries in the books of entities X and Y.

Journal entries:
2020 Books of X Books of Y
Jan. 1 Investment in entity A 303,000 Investment in entity A 303,000
Cash 303,000 Cash 303,000
Investment in JCE Investment in JCE

Dec.31 Investment loss 30,000 Investment loss 30,000

Investment in Entity A 30,000 Investment in Entity A 30,000
Dividend received Dividend received

Impairment loss 8,000 Impairment loss 8,000

Investment in Entity A 8,000 Investment in Entity A 8,000
Impairment loss Impairment loss

Note: the Investment in Entity A account in each of the venturer’s books shall be reported at.
P 265,000 ( 303,000 – 30,000 - 8,000), the carrying amount of investment in Entity A.

c. Fair value Model

 Recognizes investment initially at its transaction price. Transaction price excludes transaction costs.
 At each reporting date, the venture shall measure its investment in jointly controlled entity at fair
value , with changes in fair value recognized in profit or loss.
 A venture using fair value model shall use the cost model for any investment in jointly controlled
entity for which it is impractical to measure fair value reliably without undue cost of effort.

Illustration ( Source: Advanced Accounting Vol. 1 by Guerrero, P.P and Peralta, J.F)

Case 1
On January 1, 2020, entities X and Y each acquired 30% of the ordinary shares of entity A for
P300,000 plus transaction cost of P 3,000. X and Y immediately agreed to share control over Entity A.

On January 3, 2020, Entity a declared a dividend and paid of P 100,000 for the 2019 and on
December 31, 2020, entity A declared and paid a dividend of P 150,000for the year 2020. For the year
ended December 31, 2020 entity A recognized a profit of P 400,000.

At December 31, 2020 the fair value of each venturers’ investment in entity A is P 425,000. However ,
there is no published quotation price for Entity A.

REQUIRIED: Journal entries in the books of entities X and Y.

Journal entries:
2020 Books of X Books of Y
Jan. 1 Investment in entity A 300,000 Investment in entity A 300,000
Expense 3,000 Expense 3,000
Cash 303,000 Cash 303,000
Investment in JCE Investment in JCE

3 Cash 30,000 Cash 30,000

Dividend income 30,000 Dividend income 30,000
Dividend received Dividend received
 121

Dec.31 Cash 45,000 Cash 45,000

Dividend income 45,000 Dividend income 45,000
Dividend received Dividend received

Investment in Entity A 125,000 Investment in Entity A 125,000

Unrealized gain (inc. in fv) 125,000 Unrealized gain( Inc. in f.v.) 125,000

Note: the Investment in Entity A account in each of the venturer’s books shall be reported at.
P 425,000, the fair value.

Case 2:

On March 1, 2020, entities X and Y each acquired 30% of the ordinary shares of entity A for P300,000
plus transaction cost of P 3,000. X and Y immediately agreed to share control over Entity A.

on December 31, 2020, entity A declared and paid a dividend of P 100,000for the year 2020. For the
year ended December 31, 2020 entity A reported a profit of P 80,000.At December 31, 2020 the
recoverable amount of each venturer’s investment in entity A is P 290,000 ( 293,000 less cost to sell
of P 3,000).

REQUIRIED: Journal entries in the books of entities X and Y.

Journal entries:
2020 Books of X Books of Y
Jan. 1 Investment in entity A 300,000 Investment in entity A 300,000
Expense 3,000 Expense 3,000
Cash 303,000 Cash 303,000
Investment in JCE Investment in JCE

Dec. 31 Cash 30,000 Cash 30,000

Dividend income 30,000 Dividend income 30,000
Dividend received Dividend received

Investment loss (dec. in f.v.) 7,000 Investment loss (dec. f.v.) 7,000
Investment in Entity A 7,000 Investment in Entity A 7,000
Decrease in fair value of investment Decrease fair value of investment

Note: the Investment in Entity A account in each of the venturer’s books shall be reported at.
P 293,000, the fair value. The cost to sell are not deducted from the fair value and the
Investment are not tested for impairment.

Summary:

Cost Model Equity Method Fair Value Model

An investor which has elected
No published price quotation cost model accounts for its
investments for which there is
published price quotation using
fair value model

Transaction price including Transaction price including Transaction price excluding

transaction costs transaction costs transaction costs

Dividend income Share of profit or loss Dividend income

Cost less impairment loss Cost less impairment No impairment. Changes in fair
value to profit or loss
 122

Unit IV - JOINT ARRANGEMENT

SELF – ASSESSMENT QUESTIONS

1. Briefly explain joint arrangement.

2. Differentiate joint operation and joint venture.

3. Briefly explain the accounting procedures for joint operation if:

a. No separate books is to be maintained by the joint operation
b. Separate books is to be maintained by the joint operation

4. Briefly describe the accounting procedures for a joint venture.

5. Enumerate the three forms of joint venture under PFRS for SME. Describe each briefly.

6. Briefly explain the three methods to account for jointly controlled entities.
 123

Unit IV - JOINT ARRANGEMENT

Name: _____________________ Score___________

Section: ____________________ Date: ___________

Assignment 1 – Practice. Use yellow pad

Problem 1:

Dino, Eddie and Cinco form a joint operation on January 1,2020. The following are the transactions of the joint
operation during the year:

a. Dino contributed cash of P 100,000 and merchandise of P 50,000.

b. Eddie contributed merchandise worth, P 100,000. Freight paid by Eddie is P 5,000.
c. Finn contributed merchandise worth, P 100,000
d. Finn made purchases amounting to P 50,000.
e. Finn paid joint operation expenses of P 40,000.
f. Finn made a total sales of P 500,000.
g. Unsold merchandise inventory amounted to P 55,000.
h. Finn was appointed as the manager of the joint operation and entitled to a salary P 40,000 salary plus a
bonus of 25% of the profit after salary and bonus.
i. Interest of 10% is allowed on capital contributions.
j. Dino is charged for the cost of unsold inventory. Profit and loss after salaries, interest and bonus shall be
divided equally.

REQUIRED: Journal entries assuming :

a) No separate set of books are maintained by joint operation
b) Separate set of books are maintained for the joint operation

Problem 2: ( Source: RESA review materials)

A, B and C formed a joint operation for the sale of assorted fruits during the Christmas season. Their transactions
during the two-month period are summarized below:

Joint Operation
Nov. 5 Merchandise - A 8,500 Nov. 15 Cash sales – C 20,400
12 Merchandise – B 7,000 18 Cash sales – C 4,200
14 Freight in – C 200 30 Merchandise – B 1,210
Dec. 10 Purchased C 3,500 Dec. 23 unsold merchandise
22 Selling expenses – C 550 charged to A 540

The joint arrangement provided for the division of gains and losses among A, B and C in the ratio of 2:3:5.
The joint operation is close on December 31, 2020.

Q1. what is the joint operation profit? _______________

Q2: What is the amount of cash that A will receive on final settlement? ________________
 124

Unit IV - JOINT ARRANGEMENT

Name: _____________________ Score___________

Section: ____________________ Date: ___________

Assignment 2: Brief Exercises. Use Yellow pad for computation.

Kand L join a joint arrangement for the sale of certain merchandise. The joint operators agree to the following: K
shall be a allowed a commission of 10% on his net purchases; the joint operators shall be allowed commissions of
25% on their respective sales and K and L shall divide the profit and loss 60% and 40%, respectively. Joint
arrangement transactions are as follows:

Dec. 1 K make cash purchases of P 57,000

3 L pays joint arrangement expenses of P 9,000
5 Sales are as follows: K, P 48,000; L, 36,000. The operators keep their own cash receipts
7 K returns unsold merchandise and receives P 15,000 cash
15 The operators makes cash settlement.

1. In the distribution of the net profit of the joint arrangement, the shares of K and L:
K L . K L .
a) P 4,260 P 3,230 c) P 4,820 P 3,430
b) 4,680 3,120 d) 4,840 4,230

2. In the final settlement, L would pay K the amount of:

a) P 15,890 b) P 15,100 c) P 14,880 d) P 14,100

for items 3 – 4; ( Source: Accounting for Special Transactions by Zeus Vernon B. Milan)

Reyes and Santos formed a joint arrangement to acquire and sell a particular lot of merchandise. Reyes was to
manage the arrangement and to furnish the capital and the operators were to share equal in any gain or loss. On
June 10, 2020, Santos sent Reyes P 10,000 cash, which was immediately used to purchase merchandise which
cost P 10,000. Reyes paid freight of P 240 on the merchandise purchased. On June 24, one half of the
merchandise was sold for P 7,200 cash. Reyes paid the total cost of delivering merchandise to customer which
amounted to P 260. No further transactions occurred on June 30, 2020.

3. the profit (loss) of the arrangement for the period June 10 – June 30, 2020:
a) 1,950 b) P 1,850 c) ( 1,700) d) some other answer

4. On June 30, 2020 after recognizing the profit (loss) on the uncompleted joint arrangement , the account of
Santos on the books of Reyes will show a debit (credit) balance of:
a) 10,850 b) (10,975) c) (10,910) d) some other answer

For items 5 – 6: (Source: RESA review materials)

Ace Company purchase 40% of Basket Company on January 1, 2020 for P 500,000 that carry a voting rights at
general meeting of shareholders of Basket Company. Ace Company and Blake Company immediately agreed to
share control (wherein unanimous consent is needed to all parties involved) over Basket Company. Basket
company reports assets on that date of P 1,400,000 with liabilities of P 500,000. One building with a sever-year
life is undervalued on Basket’s books by P 140,000. Also Basket’s book value of its trademark (10-year life) is
undervalued by P 210,000. During the year, Basket’s reports net income of P 90,000 while paying dividends of
P 30,000.

5. the Investment in Basket Company account balance in the books of Ace company as of December 31:
a) P 516,000 b) P 513,900 c) P 507,600 d) P 504,000

6. the income from investment in Basket company in the books of Ace company as of December 31, 2020:
a) P 36,000 b) P 19,600 c) P 12,000 d) 7,600
 125

for items 7 – 9: (Source: RESA review materials)

Soriente, Santos and Salazar formed a joint operation. Soriente has been designated as manager of
arrangements, for which he is to receive a bonus of 15% of the profit after deduction of the bonus. The net profit
after bonus has been agreed to be divided as follows: Soriente, 25%; Santos, 40% and Salazar, 35%.

After 5 months , the joint arrangement is terminated as of May 31, 2020. On this date. The trial balance kept by
Soriente contains the following balances:
Debit Credit
Investment in joint arrangement P 9,000
Santos P 500
Salazar 2,000

The joint operations has still some undisposed of merchandise which Soriente agreed to purchase at its cost of
P 2,500. The bonus to Soriente has not yet been taken up:

7. the net profit of the joint arrangement after the bonus to Soriente is?
a) P 11,500 b) P 10,000 c) P 9,000 d) P 1,500

8. the share of Santos in the joint arrangement is:

a) P 4,600 b) P 4,000 c) P 3,600 d) P 3,500

9. the cash settlement received by Santos and Salazar:

a) Santos, P 4,000; Salazar, P 3,,500 c) Santos, P 4,000; Salazar, P 6,500
b) Santos, P 3,500; Salazar, P 3,,500 d) Santos, P 3,500; Salazar, P 5,500

10. LL, MM and NN formed a joint venture to purchase a piece of lot and to construct an apartment building for
sale. LL is to manage the joint operation; hence he will receive a bonus of 10% of the joint operation’s profit
before deducting the bonus as an expense. Any remaining gain or loss is to be divided equally among the
participants. The joint operation is completed on August 31, 2020. On this date, the accounts of MM and NN
show the following balances:

Books of
MM NN
Account with LL 16,000 Cr. 16,000 Cr.
Account with MM 32,000 Cr.
Account with NN 18,000 Dr.

There are unused construction supplies which LL agreed to take over at its cost of P 42,000. Final settlement
with the joint operators will requirement payments as follows;

a) LL pays NN P 11,200 and MM pays NN P 14,000

b) LL pays NN P 25,600 and MM P 14,400.
c) LL pays MM P 14,400 and NN pays LL P 30,800
d) LL pays MM P 35,600 and NN pays LL P 14,400

11. A and B agreed on a joint operation to purchase and sell car accessories. They agreed to contribute P 25,000
each to be used in purchasing the merchandise, share equally in any gain or loss and record their joint
operation transactions in their individual books. After one year, they decided to terminate the joint operation,
and date from their records were:

A B
Joint operation 18,000 Cr. 20,200 Cr.
Expenses paid from JO Cash 1,850 2,600
Value of inventory taken 1,000 1,800

How much is the joint operation sales?

a) P 93,350 b) P 92,650 c) P 88,450 d) P 84,670
 126

On January 5, 2020, R and S establish a joint arrangement using a separate vehicle (RS). The legal form of the
separate vehicle does not confer separation between the parties and the separate vehicle itself. That is , R and S
have rights to the net assets and obligations for the liabilities of RS. Neither the contractual terms, nor the other
facts and circumstances indicate otherwise.

R and S each owns 50% of the equity of RS. However, the contractual terms of the joint arrangements state that R
has rights to all of the transportation equipment and the obligation to pay the accounts payable in RS. And R and S
have rights to all other assets in RS and obligation for all other liabilities in RS in proportion to their equity interest.

For the year ended December 31, 2020, the Statement of financial Position of the separate vehicle RS is as follows:
Assets Liabilities and Equity
Cash 150,000 Accounts Payable 500,000
Transportation Equipment 750,000 Other liabilities 300,000
Furniture and fixtures 300,000 Equity 400,000
1,200,000 1,200,000

12. On December 31, 2020, the total assets of R in his separate statement of financial position would show:
a) P 975,000 b) P 900,000 c) P 600,000 d) P 300,000

for 13- 14:

Using the same data in no. 12, but the main feature of RS’s legal form is that the entity, not the parties, has the
rights to the assets and obligations for the liabilities, relating to the activities of the arrangement and each party
receives a share of the income from RS in accordance with their interest in RS Entity. On December 31, 2020,
RS entity reported a profit of P 100,000 .

13. The interest of S in entity RS for the year ended December 31, 2020: ______________

14. In RS’s books, give the journal entry to record contribution of R and S on Jan. 5, 2020:

For items 15 – 16:

Two real estate companies, Ace Developers and BD Holdings set up a separate vehicle( entity CE) for the purpose
of acquiring and operating a shopping centre. The contractual arrangement between the parties establishes joint
control of the activities that are conducted by entity CE. The main festure of entity CE’s legal form is that the entity,
not the parties, has the right to the assets and obligiations for the liabilities relating to the arrangement. Those
activities include the rental of the retail units, managing the car park, maintaining the centre and its equipment,
such as lifts and building the reputation ans customer base for the centre as a whole.

The terms of the contractual arrangement for 2019 and 2020 are such that:
a. Entity CE owns the shopping centre . The contractual arrangement does not specify that the parties have
rights to the shopping centre.
b. The parties are not liable in respect of the liabilities of entity CE. If entity CE is unable to pay any of its
liabilities, the liaibility of each to any third party will be limited to the parties unpaid contribution.
c. The parties have the right to sell or pledge their interests in entity CE.
d. Each party receives a share of the income from the shopping centre ( rental income net of operating costs)
in accordance with interest in entity CE.

Transactions of the contractual arrangement for 2014 and 2015 follow:

2019:
a. Ace and BD contributed 60 million each for a ½ interest in the net assets of entity CE.
b. Organization expenses incurred amount to P 600,000.
c. Entity CE acquired land at a cost of P 12 million.
d. Constructed a building (shopping centre) at a cost of 90 million.
e. Operating expenses for the year amounts to P 6 million.
f. Rental income collected from the tenants, P 60 million.
g. Net income or loss is distributed to the ventures in accordance with their interest.
 127

2020:
a. Operating expenses ( including depreciation) incurred for the year, P 21 million
b. Rental income collected for the year, P 72 million
c. Each venture received a share of the income or loss from rental income net of the operating expenses.

15. What is the interest of Ace Developers in the joint venture as of Decembe 31, 2019? ________

16. What is the interest of BD Holdings in the joint arrangement as of December 31, 2020? _______

End