ARTS-PRTC

JOINT ARRANGEMENTS
PFRS 11

AFAR MICHAEL B. BONGALONTA,CPA,MICB,MBA

Joint operation profit and Cash settlement

Use the following information for the next two questions:
The following are the transactions of a joint operation formed by A, B and C during a year:
 A contributed cash of ₱400 and merchandise costing ₱800.
 B contributed merchandise costing ₱1,600. Freight-in paid by B is ₱80.
 C made purchases amounting to ₱400 using the cash contributed by A.
 C paid expenses of ₱800 using its own cash.
 C made total sales of ₱3,200. All the merchandise was sold except one-half of those contributed
by B.
 C is appointed as the manager of the joint operation. As compensation, C is entitled to a ₱120
salary plus bonus of 25% on profit after salary and bonus.
 Interest of 10% per annum is allowed to A and B’s capital contributions.
 C is charged for the cost of any unsold inventory. Profit or loss after necessary adjustments shall
be divided equally.

1. How much is the profit or loss after salaries but before bonus of the joint operation?
a. 192 b. 240 c. 360 d. 420

2. On the cash settlement between the joint operators,

a. A pays ₱1,288 c. C receives ₱96
b. B pays ₱1,816 d. All of these

ANSWER:

1. B

Solutions:
Profit or loss is computed as follows:
Joint operation
Merchandise – A 800 3200 Sales – C
Purchases - A's cash 400  
Merchandise – B 1600 840 Unsold inventory charged to C*
Freight - in – B 80  
Expenses – C 800  
360 Profit before salary and bonus - Credit
balance
Salaries expense - C 120  
240 Profit after salary but before bonus - Credit
balance
Bonus expense** 48  
192 Profit after salary and bonus
*Unsold inventory: (₱1,600 plus ₱80 freight-in) multiplied by one-half.
2. C
Solution:
Profit is allocated to the joint operators as follows:
Allocation to: A B C Totals
Profit before salary and bonus 360
Salary to C 120 (120)
Bonus to C** 48 (48)
Profit after salary and bonus 192
Interest on capital: -
A - (300 x 10%) 120 (120)
B - (420 x 10%) 168 (168)
Profit after interests on capital (96)
Allocation (24 ÷ 3) (32) (32) (32) 96
Net share - as allocated 88 136 136 -
**Bonus is computed as follows:
P
B = P -
1 + Br
B = 240 – (240 ÷ 1.25%) = 48

Cash settlement is determined as follows:

Joint operation - A
Inventory contributed by A 400  
Cash contribution 800  
Net share in profit 88  
Cash settlement – receipt 1,288  

Joint operation - B
Inventory contributed 1,600  
Freight paid 80  
Net share in profit 136  
Cash settlement – receipt 1,816  

Joint operation – C
Expenses paid 800 840 Cost of inventory taken
Net share in profit 136
Cash settlement - receipt 96

Joint operation profit and Cash settlement between joint operators

Use the following information for the next two questions:
A and B formed a joint operation. The following were the transactions during the year:
  A B
Total purchases 400 320
Total sales 480 240
Expenses paid 800
Other income 40

The joint operation was completed at the end of the year. Each joint operator is entitled to a 10%
commission on its purchases and a 20% commission on its sales. Any remaining profit or loss is
divided equally.

3. How much is the profit (loss) of the joint operation?

a. 760 b. (760) c. 840 d. (840)

4. On the cash settlement between the joint operators,

a. A pays B ₱368 c. A pays B ₱428
b. B pays A ₱368 d. B pays A ₱428

ANSWER:

3. B

Solution:
Requirement (a): Profit or loss
Joint operation  
Purchases – A 400 480 Sales - A
Purchases – B 320 240 Sales - B
Expenses – A 800 40 Other income - B
Loss - debit balance 760  

4. B
Solution:
The loss is allocated as follows:
Allocation to: A B Totals
Loss during the year (760)
20% commission on purchases:
(10% x 400) – A 40 (40)
 (10% x 320) – B 32 (32)
25% commission on sales:
(20% x 480) – A 96 (96)
(20% x 240) – B 48 (48)
Loss to be allocated equally (976)
Allocation: (976 ÷ 2) (488) (488) 976
Net share - as allocated (352) (408) -

Cash settlement is determined as follows:

Joint operation - A
Purchases 400 480 Collections on sales
Expenses 800 352 Net share in loss
Cash settlement - receipt 368

Joint operation - B
Purchases 320 408 Net share in loss
  240 Collections on sales
  40 Collections on other income
368 Cash settlement - payment

Reconstruction of T-account – Balance of joint operation account

5. A, B, and C formed a joint operation. The following were taken from the joint operation’s books:
  Debit Credit
JO – Cash 80
B, Capital 60
C, Capital 88

The cost of unsold inventory is ₱72. The joint operation’s profit is ₱44. How much is the balance of the
joint operation account before distribution of profit?
a. 28 b. 116 c. 56 d. 0

ANSWER:

5. A

Solution:
Joint operation
Debit balance (squeeze) 28  
72 Unsold merchandise
  44 Profit - credit balance

Equity method - Downstream sale of inventory

Use the following information for the next two questions:
ABHOR Co. owns 20% in HATE Joint Venture, Inc. and uses the equity method to account
for its interest in the joint venture. ABHOR has joint control over HATE Joint Venture, Inc. In
20x1, ABHOR sold inventory to HATE Joint Venture for ₱400,000 with a 60% gross profit on
the transaction. The inventory remains unsold during 20x1 and was sold by HATE Joint
Venture to external parties only in 20x2. ABHOR’s income tax rate is 30%.

6. How much is adjusted share in the profit of the joint venture in 20x1 if the joint venture
reports profits of ₱4,000,000?
a. 362,000 b. 560,000 c. 632,000 d. 752,000

7. How much is adjusted share in the profit of the joint venture in 20x2 if the joint venture
reports profits of ₱4,800,000?
a. 960,000 b.1,008,000 c. 1,128,000 d. 1,200,000

ANSWER:

6. C
Solution:

Profit of joint venture – 20x1 4,000,000

Multiply by: Ownership interest 20%
 Share in profit of joint venture before adjustment 800,000
Elimination of unrealized profit from downstream sale –
net of tax (400,000 x 60% x 70%) (168,000)
Adjusted share in profit of joint venture – 20x1 632,000

7. C
Solution:

Profit of joint venture – 20x2 4,800,000

Multiply by: Ownership interest 20%
Share in profit of joint venture before adjustment 960,000
Realized profit from downstream sale – net of tax
(400,000 x 60% x 70%) 168,000
Adjusted share in profit of joint venture – 20x2 1,128,000

Equity method - Upstream sale of inventory

Use the following information for the next two questions:
ADHERE Co. owns 20% of STICK Joint Venture, Inc. and uses the equity method to account for its
interest in the joint venture. ADHERE has joint control over STICK Joint Venture, Inc. In 20x1, STICK
Joint Venture, Inc. sells inventory to ADHERE for ₱400,000 with a 60% gross profit on the transaction.
The inventory remains unsold during 20x1 and was sold by ADHERE to external parties only in 20x2.
ADHERE’s income tax rate is 30%.

8. How much is adjusted share in the profit of the joint venture in 20x1 if the joint venture reports
profits of ₱4,000,000?
a. 766,400 b. 752,000 c. 784,000 d. 796,000

9. How much is adjusted share in the profit of the joint venture in 20x2 if the joint venture reports
profits of ₱4,800,000?
a. 984,400 b. 993,600 c. 997,500 d. 1,002,000

ANSWER:

8. A

Solution:
Profit of joint venture – 20x1 4,000,000
Multiply by: Ownership interest 20%
Share in profit of joint venture before adjustment 800,000
Elimination of unrealized profit from upstream sale –
net of tax (400,000 x 60% x 70% x 20%) (33,600)
Adjusted share in profit of joint venture – 20x1 766,400

9. B
Solution:

Profit of joint venture – 20x2 4,800,000

Multiply by: Ownership interest 20%
Share in profit of joint venture before adjustment 960,000
Realized profit from upstream sale – net of tax
(400,000 x 60% x 70% x 20%) 33,600
Adjusted share in profit of joint venture – 20x2 993,600

Equity method - Downstream sale of depreciable asset

Use the following information for the next two questions:
ANOMALOUS Co. owns 20% interest in IRREGULAR Joint Venture, Inc. and uses the equity method to
account for its interest in the joint venture. ANOMALOUS has joint control over IRREGULAR Joint
Venture, Inc. On January 1, 20x1, ANOMALOUS sold an equipment with a carrying amount of
₱400,000 and a remaining useful life of 10 years to IRREGULAR Joint Venture for ₱480,000. Gain of
₱80,000 was recorded by ANOMALOUS. Both ANOMALOUS and IRREGULAR Joint Venture use the
straight line method of depreciation.

10. How much is adjusted share in the profit of the joint venture in 20x1 if the joint venture reports
profits of ₱4,000,000?
a. 728,000 b. 752,000 c. 784,000 d. 733,000
11. How much is adjusted share in the profit of the joint venture in 20x2 if the joint venture reports
profits of ₱4,800,000?
a. 976,400 b. 993,600 c. 968,000 d. 1,040,000

ANSWER:

10. A
Solution:

Profit of joint venture – 20x1 4,000,000

Multiply by: Ownership interest 20%
Share in profit of joint venture before adjustment 800,000
Elimination of unrealized gain from downstream sale
(80,000 x 9/10) (72,000)
Adjusted share in profit of joint venture – 20x1 728,000

11. C

Solution:
Profit of joint venture – 20x2 4,800,000
Multiply by: Ownership interest 20%
Share in profit of joint venture before adjustment 960,000
Recognition of realized gain from downstream sale
(80,000 ÷ 10 years) 8,000
Adjusted share in profit of joint venture – 20x2 968,000

ANSWER:

c. 968,000 d. 1,040,000

Equity method - Upstream sale of depreciable asset

Use the following information for the next two questions:
Use the same information in the preceding problem except that the sale is an upstream sale.
12. How much is adjusted share in the profit of the joint venture in 20x1 if the joint venture reports
profits of ₱4,000,000?
a. 723,600 b. 758,600 c. 785,600 d. 736,400

13. How much is adjusted share in the profit of the joint venture in 20x2 if the joint venture reports
profits of ₱4,800,000?
a. 976,400 b. 963,600 c. 961,600 d. 1,020,400

ANSWER:

12. C
Solution:

Profit of joint venture – 20x1 4,000,000

Multiply by: Ownership interest 20%
Share in profit of joint venture before adjustment 800,000
Elimination of unrealized gain from upstream sale
(80,000 x 9/10 x 20%) (14,400)
Adjusted share in profit of joint venture – 20x1 785,600

13. C
Solution:

Profit of joint venture – 20x2 4,800,000

Multiply by: Ownership interest 20%
Share in profit of joint venture before adjustment 960,000
Recognition of realized gain from upstream sale
(80,000 ÷ 10 years) x 20% 1,600
Adjusted share in profit of joint venture – 20x2 961,600

Equity method - Downstream sale of non-depreciable asset

Use the following information for the next two questions:
APLOMB Co. owns 20% interest of POISE Joint Venture, Inc. and uses the equity method to account
for its interest in the joint venture. APLOMB has joint control over POISE Joint Venture, Inc. On
January 1, 20x1, APLOMB sold land with a carrying amount of ₱400,000 to POISE Joint Venture for
₱480,000. Gain of ₱80,000 was recorded by APLOMB.

14. How much is adjusted share in the profit of the joint venture in 20x1 if the joint venture reports
profits of ₱4,000,000?
a. 720,000 b. 758,000 c. 784,000 d. 736,000

15. How much is adjusted share in the profit of the joint venture in 20x2 if the joint venture reports
profits of ₱4,800,000?
a. 976,000 b. 960,000 c. 962,000 d. 1,020,000

ANSWER:

14. A

Solution:
Profit of joint venture – 20x1 4,000,000
Multiply by: Ownership interest 20%
Share in profit of joint venture before adjustment 800,000
Elimination of unrealized gain from downstream sale (80,000)
Adjusted share in profit of joint venture – 20x1 720,000

15. B

Solution:
Profit of joint venture – 20x2 4,800,000
Multiply by: Ownership interest 20%
Share in profit of joint venture – 20x2 960,000