AC316 Accounting for Special Transactions

ASSIGNMENT 1:

Joint Arrangements - Explore on:

PFRS 11 or IFRS 11: JOINT ARRANGEMENT

● Joint Operations
❖ Nature and Scope
An entity has rights to assets and obligations to liabilities incurred in a
joint arrangement, it shall account for those rights and obligations directly.
(JOINT OPERATORS)

❖ Differentiate from Joint Operation vs Business Combinations

The accounting standards use in Joint Operation are the Philippine Financial
and Reporting Standards (PFRS) 11 while the Business Combinations are
the PFRS 3.
❖ Application - Standards, Methods, and Accounting for Joint Operations
Transactions (Give Illustrative Example)
✔ Applicable Standard - PFRS 11
✔ Accounting Methods: At the reporting date, the individual financial
statements of each Joint Operator will recognize:
o Its share of Assets held Jointly
o Its share of Liabilities incurred Jointly
o Its share of Revenue from the Joint Operation
o Its share of Expensed from the Joint Operation
✔ Illustrative Example:
Zerna Inc., Anglo Co., Sergote Inc. sign an agreement to collectively
purchase a gas 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 are PHP 100,000,000. The pipeline has
an estimated 20-year useful life with no residual value. The management
fee for operating the pipeline for 20x4 was PHP 20,000,000. Revenue
earned from the pipeline in 20x4 was PHP 50,000,000. Zerna invested
PHP 25,000,000 for a 40% interest.

Required: Prepare the following entries for 20x4 for A Inc.

Gas Pipeline 25,000,000

Cash 25,000,000

Gas Pipeline Operating Expense 8,000,000

Cash 8,000,000

Cash 20,000,000
Revenue from Pipeline 20,000,000
 Amortization Expense – Pipeline 1,250,000
Accumulated Depreciation – Gas Pipeline 1,250,000

Proportionate Total (100%)

Share (40%)

Revenue 20,000,000 50,000,000

Less: Operating Expenses 8,000,000 20,000,000

Amortization Expense (25,000,000/20 years) 1,250,000

Amortization Expense (100,000,000/ 20 years) 5,000,000

Net Income of the Joint Operation 25,000,000

Multiplied by: 40% Interest 40%

Net Income of A 10,000,000 10,000,000

● Joint Venture
❖ Nature and Scope
An entity has rights only to the net assets (Assets – Liabilities = Net
Assets) of a joint arrangement, it shall account for its share of the net assets
directly. (JOINT VENTURERS)
❖ Differentiate from Joint Venture vs Business Combinations
The accounting standards use in Joint Venture is the Philippine Accounting
Standards (PAS) 28 while the Business Combinations is the Philippine
Financial Reporting Standards (PFRS) 3.
❖ Application - Standards, Methods, and Accounting for Joint Venture
Transactions (Give Illustrative Example)
✔ Applicable Standards – PAS 28
✔ Accounting Methods: Equity Method
✔ Illustrative Examples:
On January 1, 20x4, Sergote Company, Anglo Company, and Zerna
Company set up a separate vehicle (ZAS Corporation) to acquire and
operate a shopping mall. The contractual arrangement between the
parties establishes joint control of the activities that are conducted in ZAS
Corporation. The main feature of ZAS Corporation's legal form is that the
entity, not the relating to the arrangement. These activities include the
rental of retail units, managing the car park, maintaining the center and its
equipment, such as lifts, and building the reputation and customer base
for the center as a whole.
As a result, Zerna Company paid PHP 5,000,000 for 100,000 shares of
ZAS Corporation voting common stock, which represents a 45%
investment. No allocation to goodwill or other specific account was made.
The Joint Control over ZAS Corporation is achieved by this acquisition
and so Zerna Company applies the equity method. ZAS Corporation
distributed PHP 5 per share during the year and reported a net income of
PHP 1,500,000.

Required: Prepared Journal Entries in the book of Zerna Company.

 Investment in Joint Venture 5,000,000
Cash 5,000,000
To record the initial investment.
Cash 500,000
Investment in Joint Venture 500,000
To record the received dividends. (100,000 shrs. x 5 per shrs.)

Investment in Joint Venture 675,000

Income from Joint Venture 675,000
To record the share in net income. (1,500,000 x 45%)

END