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CMPC Joint Arrangements
CMPC Joint Arrangements
CMPC Joint Arrangements
JOINT VENTURE
Basic Principle:
- Under the equity method, on initial recognition the investment in an associate or a joint venture is recognized at
cost, and the carrying amount is increased or decreased to recognize the investor's share of the profit or loss of the
investee after the date of acquisition.
Example 1:
On January 1, 2020, two real estate companies (the parties – Packet Company and Sacket Company) set up a
separate vehicle (Harrison Company) for the purpose of acquiring and operating a shopping center. The contractual
arrangement between the parties establishes joint control of the activities that are conducted in Harrison Company.
The main feature of Harrison’s legal form is that the entity, not the parties, has rights to the assets, and obligations
for the liabilities, relating to the arrangement. These activities include the rental of the 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, Packet Company paid $1,600,000 for 500,000 shares of Harrison’s voting common
stock, which represents a 40% investment. No allocation to goodwill or other specific account was made. The joint
control over Harrison is achieved by this acquisition and so Packet applies equity method. Harrison distributed a
dividend of $2 per share during the year and reported net income of $560,000. What is the balance in the Investment
in Harrison account found in Packet’s financial records as of December 31, 2020?
Example 2:
Ace Company purchases 40% of Basket Company on January 1 for
$500,000 that carry voting rights at a general meeting of
shareholders of Basket Company. Ace Company and Blake
Company immediately agreed to share control (wherein unanimous
consent is needed to all the parties involved) over Basket Company. Basket reports assets on that date of
$1,400,000 with liabilities of $500,000. One building with a seven-year life is undervalued on Basket’s books by
$140,000. Also, Basket’s book value for its trademark (10-year remaining life) is undervalued by $210,000. During
the year, Basket reports net income of $90,000, while paying dividends of $30,000. What is the Investment in Basket
Company balance in Ace’s financial records as of December 31?
Example 3:
On January 1, 2020, Wilkins, Inc. acquired 20% of the
outstanding common stock of Bremm, Inc. for $700,000.
This investment gave Wilkins the joint control over Bremm.
Bremm’s assets on that date were recorded at $3,900,000
with liabilities of $900,000. Any excess of cost over book
value of the investment was attributed to patent having a
remaining useful life of 10 years. In 2020, Bremm reported
net income of $170,000. In 2021, Bremm reported net
income of $210,000. Dividends of $70,000 were paid in each
of these two years. What is the equity method balance of
Wilkin’s Investment in Bremm, Inc. on December 31, 2021?