II – JOINT OPERATOR (Proportionate Share)

Reporting Proportionate Share of the Assets, Liabilities, Revenues, and Expenses of the
Joint Operation (Unincorporated)
X Inc., Y Co., and Z Inc. sign an agreement to collectively purchase an oil pipeline and to hire a
company to manage and operate the pipeline on their behalf. The costs involved in running the
pipeline and the revenue earned from the pipeline are shared by the three parties based on their
ownership percentage. All major operating and financing decisions related to the pipeline must
be agreed to by the three companies. The cost of purchasing the pipeline was P60,000,000. The
pipeline has an estimated 20-year useful life with no residual value. The management fee for
operating the pipeline for 20x4 was P12,000,000. Revenue earned from the pipeline in 20x4 was
P19,800,000. X invested P18,000,000 for a 30% interest.
Required:
1. Prepare entries in the books of X, Inc. for 20x4 to capture or recognize its share of the
activities related to the oil pipeline
2. Compute the share of X Inc. in the net income of the joint operation for 20x4.

Problem II
1.
Oil Pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000,000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000,000

Oil Pipeline operating expenses (30% x P12,000,000). . . . . . . . . . . . . . 3,600,000

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600,000

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,940,000
Revenue from Oil Pipeline (30% x P19,800,000) . . . . . . . . . . . . . . . . 5,940,000

Amortization expense – pipeline (P18,000,000/20 years). . . . . . . . . . . 900,000

Accumulated depreciation – oil pipeline. . . . . . . . . . . . . . . . . . . . . 900,000

Thus, the share of X Inc. in net income of the joint operations would be as follows:
Proportionate Total (100%
Share (30%) based)
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 5,940,000 P19,800,000
Less: Operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600,000 12,000,000
Amortization expense: P18,000,000 ( 30%) / 20 years. . . . . . . . 900,000
P60,000,000 (100%) / 20 years. . . . . . . . _3,000,000
Net Income of the Joint Operation. . . . . . . . . . . . . . . . . . . . . . . . . . . . P 4,800,000
Multiplied by: 30% interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __________ ______30%
Net Income of X. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 1,440,000 P 1,440,000
 VI – JOINT OPERATION Entity: Partnership in Nature (Unincorporated)
AA, BB, and CC agree to sell construction tools for a period of one month. AA agrees to construct
a stand on the front the lawn of CC. CC will be paid P3,000 for cleaning up the lawn after the
one-month selling period. AA, BB, and CC decide that net income, if any will be allocated first by
the P3,000 payment to CC and then by a 40% commission on individual sales. The balance will be
distributed 75% to AA and 25% to BB. They agree that a cash box will complicate the matters and
that all purchases and sales transactions will be out-of-pocket and the responsibility of the
individual. Sales to AA, BB, and CC are to be at cost, except that the ending inventory may be
purchased at 50% of cost. All other sales are to be made at 100% markup on cost.
The activity of the joint operation is as follows:
a. AA construct the stand on the front lawn at a cost of P12,000.
b. AA pays for P120,000 for various construction tools. CC pays P6,000 for permit to operate
the concession or business.
c. AA purchases additional construction tools for P180,000, using P60,000 contributed by BB
and P120,000 of personal money
d. Sales for the period were as follows: AA, P204,000; BB, P312,000, and CC, P72,000.
e. CC pays P10,800 for office supplies and these are distributed equally between AA, BB, and
CC for their personal use at home. CC agrees to pay P6,000 for the stand.
f. The balance of construction tools inventory was taken by AA.
Required:
1. Determine the joint operations net income or loss.
2. Determine the cash settlement between joint operators (indicate the amount of cash
settlement – indicate the manner of payment)

Problem VI
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** _279,000 ________ ________ __112,200 ________ _135,000 _______ 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.

IV - JOINT OPERATOR (Proportionate Share)

Reporting Proportionate Share of the Assets, Liabilities, Revenues, and Expenses of the
Joint Operation (Unincorporated)
On January 1, 20x4 entities J, K, L, M and N (the joint operators) jointly buy a jet aircraft for
P12,000,000 cash. The operators are the registered as equal joint owners of the aircraft. They enter
into an agreement whereby the aircraft is at the disposal of each operator for 70 days each year.
The aircraft is in maintenance for the remaining days each year. The operators may decide to use
the aircraft, or, for example, lease it to a third party. Decisions regarding maintenance and
disposal of the aircraft require the unanimous consent of the operators. The contractual
arrangement is for the expected life (20 years) of the aircraft and can be changed only if all of
the operators agree. The residual value of the aircraft is zero.
In 20x4 the operators each paid P120,000 to meet the joint costs of maintaining the aircraft (e.g.,
hangar rental and aviation license fees).
In 20x4 each operator also incurred costs of running the aircraft when they made use of the
aircraft (e. g., entity J incurred costs of P60,000 on pilot fees, aviation fuel and landing costs).
In 20x4 entity J also earned rental income of P456,000 by renting the aircraft to others.
Required:
1. Prepare entries in the books of joint operator Entity J to reflect the above transaction.
2. Compute the share in net income of entity J in the joint operations

Problem IV
The joint operator, Entity J 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 456,000
Profit or loss (rental income) 456,000
 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.

VII - Joint Venturer (Investor) is Not a Parent and

Does Not Prepare Consolidated Financial Statements – Equity Method
Two real estate companies set up a separate vehicle for the purpose of acquiring and operating
condominium units. One of the companies, SS Company paid P2,016,000 for a 30% interest in AA
Corporation’s (a separate vehicle) outstanding voting stock on January 1, 20x4. Such acquisition
gave SS Corporation to joint control with another company over AA Corporation. The book values
and fair values of AA’s assets and liabilities on January 1, along with amortization data, are as
follows:
AA Co. AA Co.
Book value Fair value
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 480,000 P 480,000
Accounts receivable – net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 840,000 840,000
Inventories (sold in 20x4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200,000 1,440,000
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000 240,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,080,000 2,040,000
Buildings – net (10 year remaining life) . . . . . . . . . . . . . . . . . . . . . . 1,800,000 2,400,000
Equipment – net (7 year remaining life) . . . . . . . . . . . . . . . . . . . . . 1,440,000 600,000
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P7,080,000 P8,040,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 960,000 P 960,000
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000 240,000
Bonds payable (due January 1, 20x9) . . . . . . . . . . . . . . . . . . . . . . . 1,200,000 1,320,000
Common stock, p10 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,080,000
Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . P7,080,000

AA Corporation reported net income of P1,440,000 for 20x4 and paid dividends of P720,000.
Required:
1. Prepare the schedule of determination and allocation of excess
2. Prepare entries in the books of the joint venturer in 20x4 in relation to its investment in joint
venture, assuming that the joint venture does not prepare consolidated financial statements
using equity method
3. In relation to No. 2, determine:
a. Investment in Joint Venture-SS Company and
b. Investment income (equity in net earnings) for 20x4.
Problem VII (Equity Method)
1.
Schedule of Determination and Allocation of Excess
Date of Acquisition – January 1, 20x4
Cost of investment
Consideration transferred P2,016,000
Less: Book value of stockholders’ equity of Son:
Common stock (P3,600,000 x 30%) P 1,080,000
Retained earnings (P1,080,000 x 30%) 324,000 1,404,000
Allocated excess (excess of cost over book value) P 612,000
Less: Over/under valuation of assets and liabilities:
Increase in inventory (P240,000 x 30%) P 72,000
Increase in land (P960,000 x 30%) 288,000
Increase in building (P600,000 x 30%) 180,000
Decrease in equipment (P840,000 x 30%) ( 252,000)
Increase in bonds payable (P120,000 x 30%) ( 36,000) 252,000
Positive excess: Goodwill (excess of cost over fair value) P 360,000

The over/under valuation of assets and liabilities are summarized as follows:

AA Co. AA Co. (Over) Under
Book value Fair value Valuation
Inventories (sold in 20x4) P1,200,000 P1,440,000 P 240,000
Land 1,080,000 2,040,000 960,000
Buildings – net ( 10 year remaining life) 1,800,000 2,400,000 600,000
Equipment – net ( 7 year remaining life) 1,440,000 600,000 ( 840,000)
Bonds payable (due January 1, 20x9) ( 1,200,000) (1,320,000) ( 120,000)
Net P4,320,000 P5,160,000 P 840,000

A summary or depreciation and amortization adjustments is as follows:

Over/ 30% Current
Account Adjustments to be amortized Under thereof Life Year(20x4)
Inventories (sold in 20x4) P 240,000 P 72,000 1 P 72,000
Land 960,000 288,000 - -
Buildings – net ( 10 year remaining life) 600,000 180,000 10 18,000
Equipment – net ( 7 year remaining life) ( 840,000) ( 252,000) 7 (36,000)
Bonds payable (due January 1, 20x9) ( 120,000) ( 36,000) 5 ( 7,200)
Net P 840,000 P 252,000 P 46,800

2. The following are entries recorded by the parent in 20x4 in relation to its investment in joint
venture:
January 1, 20x4:
(1) Investment in AA Company 2,016,000
Cash 2,016,000
Acquired 30% joint control in AA Company.

January 1, 20x4 – December 31, 20x4:

(2) Cash 216,000
Investment in AA Company (P720,000 x 30%) 216,000
Record dividends from AA Company.
 December 31, 20x4:
(3) Investment in AA Company 432,000
Investment income (P1,440,000 x 30%) 432,000
Record share in net income of AA Company.

December 31, 20x4:

(4) Investment income 46,800
Investment in AA Company……………………. 46,800
Record amortization of allocated excess of inventory,
equipment, buildings and bonds payable.

3. Thus, the investment balance and investment income in the books of SS Company (the Joint
Venturer) are as follows:
a. P2,185,200
Investment in Joint Venture (AA Company)
Cost, 1/1/x4 2,016,000 216,000 Dividends – Son (720,000x 80%)
NI of AA 46,800 Amortization
(1,440,000 x 30%) 432,000
Balance, 12/31/x4 2,185,200

b. P385,200
Investment Income
Amortization 46,800 NI of AA
432,000 (P1,440,000 x 30%)
385,200 Balance, 12/31/x4

To check the balance of Investment in Joint Venture (AA Company):

AA Company’s Stockholders’ Equity, 12/31/20x4:
Common stock P3,600,000
Retained earnings
Retained earnings,1/1/20x4 P 1,080,000
Net income – 20x4 1,440,000
Dividends – 20x4 ( 720,000) 1,800,000
Book value of stockholders’ equity of AA Company,12/31/20x4 P5,400,000
Multiplied by: Interest in Joint Venture 30%
Book value of Interest in Joint Venture P1,620,000
Add: Unamortized allocated excess – 30% thereof
P252,000 – P46,800, amortization) 205,200
Goodwill 360,000
Investment in Joint Venture (AA Company) – equity method P2,185,200
 I - JOINT OPERATION Entity (Unincorporated)
On January 1, 20x4, KK Company and DD Company signed an agreement to form a joint
operation to manufacture a product called plasma. This product is used in the manufacturing of
television.
To commence the operation, both operators contributed P180,000 in cash.
Required:
1. Prepare journal entries to record the following:
a. Contributions of cash by the operators
b. Use of cash and loan to buy machinery & equipment costing P96,000 (cash paid,
P60,000 and the balance on a loan account) and raw materials purchase on account
costing P78,000.
c. Payment of wages (labor) amounting to P86,400 with P84,000 paid in cash.
d. Loans from the bank, P72,000.
e. Repayment of loan – machinery and equipment, P12,000, raw materials amounting to
P50,400 and other factory expenses, of P156,000.
f. Depreciation of machinery and equipment, P9,600.
g. Transfer of materials, labor and overhead to Work-in-Process: payroll, P86,400;
Materials, P57,600; Factory overhead – heat, light and power, P156,000 and
depreciation of P9,600.
h. Transfer of Work-in-Process to Finished Goods Inventory, P216,000
i. Transfer of Finished Goods Inventory, P192,000 to Joint Operators throughout the year
2. Using the same information in No. 1, determine the ending balance in:
a. Cash
b. Work-in-process account
3. Using the same information in No. 1 and 2 above, determine on December 31, 20x4:
a. Total assets
b. KK’s investment
c. DD’s investment

Problem I
1.
• Contributions of cash by the operators
Cash 360,000
KK Company 180,000
DD Company 180,000
Contribution by joint operators.

• Use of cash and loan to buy machinery & equipment and raw materials
Machinery and equipment 96,000
Cash 60,000
Loans payable – machinery and equipment 36,000
Contribution by joint operators.

Materials 78,000
Accounts payable 78,000
Acquisition of materials.
• Payment of wages (and salaries):
Wages (and salaries) 86,400
Cash 84,000
Accrued payroll 2,400
Annual labor.

• Loans from the bank

Cash 72,000
Bank loans payable 72,000
Amount borrowed.

• Repayment of loan – machinery and equipment and other factory expenses

Loan payable – machinery and equipment 12,000
Cash 12,000
Partial payment of loan.

Accounts payable 50,400

Cash 50,400
Payment of trade creditors.

Factory overhead control – heat, light and power 156,000

Cash 156,000
Payment of manufacturing expenses such as heat, light
and power.

• Depreciation of machinery and equipment

Factory overhead control – depreciation 9,600
Accumulated depreciation 9,600
Depreciation of equipment.

• Transfer of materials, labor and overhead to Work-in-Process

Work-in-process 309,600
Wages (and salaries) 86,400
Materials 57,600
Factory overhead control – heat, light and power 156,000
Factory overhead control – depreciation 9,600
Allocation of costs to work-in-process

• Transfer of Work-in-Process to Finished Goods Inventory.

Finished goods 216,000
Work-in-process 216,000
Allocation to finished goods

• Transfer of Finished Goods Inventory to Joint Operators throughout the year

KK Company 96,000
DD Company 96,000
Finished goods 192,000
 Delivery of output to joint operators.

2.
Cash
Contribution – Drei 180,000 60,000 Machinery and equipment
Contribution – Cerise 180,000 84,000 Labor
Bank loan 60,000 12,000 Machinery and equipment
50,400 Accounts payable
156,000 Factory overhead control
Balance, 12/31/x4 57,600

Work-in-Process
Labor 86,400 216,000 to Finished Goods
Materials 57,600
Factory Overhead – heat, etc. 156,000
Factory Overhead – depreciation 9,600
Balance, 12/31/x4 93,600

3.
a. Total assets, P282,000
b. KK’s investment, P84,000
c. DD’s investment, P84,000
December 31, 20x4
Assets
Current Assets
Cash P 57,600
Finished goods inventory 24,000
Work-in-Process inventory 93,600
Materials inventory 20,400
Total current assets P 195,600
Non-current Assets
Equipment P 96,000
Less: Accumulated depreciation 9,600 86,400
Total Assets P282,000
Liabilities and Net Assets
Current Liabilities
Accrued payroll P 2,400
Accounts payable 27,600 P 30,000
Non-current Liabilities
Bank loan payable P 60,000
Loan payable – machinery and equipment 24,000 __84,000
Total Liabilities P 114,000
Net Assets 168,000
Total Liabilities and Net Assets P282,000

Joint Operator’s Equity

KK Company: Contributions – January 1, 20x4 P 180,000
Cost of inventory distributed ( 96,000) P 84,000

DD Company: Contributions – January 1, 20x4 P 180,000

Cost of inventory distributed ( 96,000) P 84,000
Total Joint Operator’s Equity P168,000