Assessment Test 2: Joint Arrangements

Theories: Multiple Choice

1. A ___ is an arrangement of which two or more parties have joint control.
a. joint arrangement
b. joint undertaking
c. joint venture
d. joint operation

2. A ___ is the

contractually agreed sharing of control of an arrangement, which exists only when decisions about the
relevant activities require the unanimous consent of the parties sharing control.
a. joint control
b. joint undertaking
c. joint operation
d. joint venture

3. A ___ is a joint arrangement whereby the parties that have joint control of the arrangement have
rights to the assets, and obligations for the liabilities, relating to the arrangement.

a. joint undertaking
b. joint operation
c. joint arrangement
d. joint venture

4. A ___ is a joint arrangement whereby the parties that have joint control of the arrangement have
rights to the net assets of the arrangement.

a. joint undertaking
b. joint operation
c. joint arrangement
d. joint venture

5. Parties in a joint operation are called ____.

a. joint venturers
b. joint controllers
c. joint operators
d. joint undertakers

6. Parties in a joint venture are called ____.

a. joint venturers
b. joint controllers
c. joint operators
d. joint undertakers
7. An entity that participates in a joint arrangement.
a. joint venturers
b. joint controllers
c. joint operators
d. party to a joint arrangement

8. A separately identifiable financial structure, including separate legal entities or entities recognized by
statute, regardless of whether those entities have a legal personality.
a. separate clause
b. separate financial statement
c. separate vehicle
d. separate entity

9. Which of the following is a characteristic of joint arrangement

a. The parties are bound by a contractual arrangement
b. The contractual arrangement gives two or more of those parties joint control of the
arrangement
c. Both a and b
d. None of the above

10. According to IFRS 11, a joint venturer shall recognize its interest in a joint venture as an investment
and shall account for that investment using the ____ method
a. equity
b. fair value through profit and loss
c. proportionate consolidation
d. fair value through other comprehensive income

11. According to IFRS, the classification of joint arrangements requires the parties to assess their rights
and obligations arising from the arrangement. When making that assessment, an entity shall consider
the following, EXCEPT:
a. the choice between proportionate consolidation and the equity method
b. when relevant, other facts and circumstances
c. the terms of the contractual arrangement
d. the legal form of the separate vehicle

12. A joint operator shall recognize in relation to its interest in a joint operation, EXCEPT:
a. its assets, including its share of any assets held jointly
b. its liabilities, including its share of any liabilities incurred jointly
c. its revenue from the sale of its share of the output arising from the joint operation
d. None of the above

13. A joint arrangement that is not structured through a separate vehicle:

a. a joint venture
b. a joint operation
c. can be either a joint venture or a joint operation
d. a joint control
14. A joint arrangement in which the assets and liabilities relating to the arrangement are held in a
separate vehicle:
a. a joint venture
b. a joint operation
c. can be either a joint venture or a joint operation
d. a joint control

15. Which of the following statements is in accordance to IFRS 11: Joint Arrangements?
a. Investors in jointly controlled entities account for their investment under equity method if their
ownership percentage is more than 20%
b. The joint undertaking sets out the terms upon which the parties participate in the activity that is
the subject of the arrangement.
c. In a joint arrangement, no single party controls the arrangement on its own. A party with joint
control of an arrangement can prevent any of the other parties, or a group of the parties, from
controlling the arrangement.
d. All arrangements require the activity that is the subject of the arrangement to be undertaken in
a separate vehicle.

Problems

16. On January 1, 2020, Cream Co. and Nichols Co. enter into a contractual agreement to form a joint
arrangement deemed to be a joint operation. 

Their agreement provides that Cream will contribute land with a fair value of P9,000,000 (book value
P8,000,000) and machinery with a fair value of P3,000,000 (net book value P2,000,000); while Nichols
will contribute P8,000,000 in cash. 

It was further agreed that they will share output, assets and future contributions in the ratio of 60:40 for
Cream and Nichols, respectively.

What are the journal entries to record the formation of the joint operation in the books of Cream and
Nichols?

A. B.

C. D.
17. On January 1, 2020, Pork Ltd, Tower Ltd, and Hook Ltd. entered into a joint operation to produce
low-cost suits. The joint operators equally share in output and costs. On the same date, the recorded
amounts of each joint operator's contributions are as follows (See the picture).

Assume that agreed values equal recoverable amount and no revaluation have occurred. Which of the
following combinations correctly indicates the effects on the statement of financial position and
statement of financial performance of Tower Ltd, respectively, after recording the journal entries to
account for this joint operation arrangement?

a. No change; no change.
b. Asset increase; profit increase.
c. Asset decrease; profit decrease.
d. Asset increase; profit decrease.

For nos. 18-21.

Entity A and Entity B incorporated Entity C to manufacture a microchip to be used by the incorporating
entities as component for their final products of cellular phones and tablets.
The contractual agreement of the incorporating entities provides that the decisions on relevant activities
of Entity C will require the unanimous consent of both entities.

Entity A and Entity B have rights to the assets, and obligations for the liabilities, relating to the
arrangement. The capital stocks of Entity C will be owned by Entity A and Entity B in the ratio of 60:40.
At the end of first operation of Entity C, the financial statements provided the following data (See the
picture).

The contractual agreement of Entity A and Entity B also provides for the following concerning the assets
and liabilities of Entity C:
• Entity A owns the land and incurs the loans payable of Entity C. Entity B owns the building and incurs
the notes payable of Entity C.
• The other assets and liabilities are owned or owed by Entity A and Entity on the basis of their capital
interest in Entity C.
• The sales revenue of Entity C includes sales to Entity A and Entity B in the amount of P1,000,000 and
P2,000,000, respectively. As of the end of the first year, Entity A and Entity B was able to resell 30% and
60% of the inventory coming from Entity C to third persons.
18. What is the amount of total assets to be reported by Entity A concerning its interest with
Entity C?

a. 5,400,000
b. 3,000,000
c. 3,600,000
d. 5,000,000

19. What is the amount of total liabilities to be reported by Entity B concerning its interest with Entity C?
a. 1,800,000
b. 2,200,000
c. 2,800,000
d. 2,400,000

20. What is the amount of sales revenue to be reported by Entity A concerning its interest with Entity C?
a. 2,300,000
b. 2,100,000
c. 3,000,000
d. 2,500,000

21. What is the amount of sales revenue to be reported by Entity B concerning its interest with Entity C?
a. 2,000,000
b. 1,200,000
c. 1,600,000
d. 1,400,000

For nos. 22-25

On January 1, 2021, Entity A, a public entity and Entity B, a public entity incorporated Entity C which has
its fiscal and operational autonomy. The contractual agreement of the incorporating entities provides
that the decisions on relevant activities of Entity C will require the unanimous consent of both entities.
Entity A and Entity B will have rights to the net assets of Entity C.

Entity A and Entity B invested P1,000,000 and P1,500,000, respectively, equivalent to 40:60 capital
interest of Entity C.

The financial statements of Entity C provide the following data for its three-year operation(See the
picture below).
22. What is the balance of Investment in Entity C to be reported by Entity A in its Statement of Financial
Position on December 31, 2021?

a. 1,000,000
b. 1,040,000
c. 1,080,000
d. 1,200,000

23.
What is the investment loss to be reported by Entity B concerning its interest in Entity C for the year
ended December 31, 2022?
a. 1,560,000
b. 1,800,000
c. 1,620,000
d. 1,500,00

24. What is the investment income to be reported by Entity A concerning its interest in Entity C for the
year ended December 31, 2023?
a. 2,000,000
b. 1,900,000
c. 1,920,000
d. 1,840,000

25. What is the balance of Investment in Entity C to be reported by Entity B in its Statement of Financial
Position on December 31, 2023?
a. 2,400,000
b. 3,000,000
c. 2,760,000
d. 2,160,000
For nos. 26-28
On January 1, 2020, Entity A, a public entity and Entity B, a public entity incorporated Entity C by
investing P3,000,000 and P2,000,000 for capital interest ratio of 60:40. The contractual agreement of
the incorporating entities provides that the decisions on relevant activities of Entity C will require the
unanimous consent of both entities. Entity A and Entity B will have rights to the net assets of Entity C.

The financial statements of Entity C provide the following data for its two-year operation:

• Entity C reported net income (net loss) in the amount of P1,000,000 and (P500,000) for year 2020 and
2021, respectively, and declared dividends in the amount of P400,000 and P100,000 for year 2020 and
2021, respectively.
• During 2020, Entity C sold inventory to Entity A with gross profit of P50,000. 80% of those inventories
were resold by Entity A to third persons during 2020 and the remainders were resold to third persons
during 2021. • On July 1, 2020, Entity C sold a machinery to Entity B at a loss of P20,000. At the time of
sale, the machinery has remaining useful life of 2 years.

26. What is the investment income to be reported by Entity A for the year ended December 31, 2020?
a. 603,000
b. 606,000
c. 594,000
d. 597,000

27. What is the investment loss to be reported by Entity B for the year ended December 31, 2021?
a. (200,000)
b. (196,000)
c. (204,000)
d. (202,000)

28. What is the balance of Investment in Entity C to be reported by Entity A on December 31, 2021?
a. 3,000,000.
b. 2,940,000
c. 3,020,000
d. 3,120,000

For nos. 29-30

On January 1, 2020, Entity A and Entity B, both SMEs, incorporated Entity C, a jointly controlled entity by
investing P500,000 each in exchange for 10,000 ordinary shares each of Entity C. Entity A and Entity B
each incurred P20,000 transaction costs. The contractual agreement of the incorporating entities
provides that the decisions on relevant activities of Entity C will require the unanimous consent of both
entities. Entity A and Entity B will have rights to the net assets of Entity C.

For the year ended December 31, 2020, Entity C reported net income of P100,000 and declared
dividends in the amount of P30,000.
On December 31, 2020, the shares of stocks of Entity C are quoted at P56.
29. If Entity A elected fair value model to account its investment in Entity C, what is the net effect in
Entity A's profit or loss for the year ended December 31, 2020?
a. 35,000 net profit
b. 60,000 net profit
c. 15,000 net profit
d. 40,000 net profit

30. If Entity B elected equity method to account its investment in Entity C, what is the book value of
Entity B's Investment in Entity C on December 31, 2020?
a. 520,000
b. 540,000
c. 535,000
d. 555,000