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STRAIGHT PROBLEMS

ON JOINT ARRANGEMENTS

Problem 1. JOINT OPERATIONS – UNINCORPORATED Required:


ENTITY SHARING OUTPUT TO OPERATORS.
1. Prepare the journal entries in the records of MIRROR
On January 1, 2018, MIRROR CORPORATION and IMAGE, CORPORATION and IMAGE, INC. in relation to the
INC. establish a joint arrangement to manufacture a joint operation.
product. Each company has a 50% interest in the
activity and will share on total output equally.
MIRROR’S initial contribution consisted of P6,250,000
SOLUTION:
cash and IMAGE contributed machinery that was carried
in the books of IMAGE at P5,937,500. The fair value of
BOOKS OF MIRROR:
the machinery at that date was P6,250,000. During the Cash in JO 3,125,000 (6,250,000 x 50%)
first year of operation both parties contributed a further Machinery in JO 3,125,000 (6,250,000 x 50%)
P9,375,000 each. Cash 6,250,000
Initial investment.
On December 31, 2018, the manager of the joint
Cash in JO 9,375,000
operations provided the following statements: Cash 9,375,000
Additional investment.
Costs incurred for the year ended December 31, 2018:
BOOKS OF IMAGE:
Cash in JO 3,125,000 (6,250,000 x 50%)
Wages P5,750,000 Machinery in JO 2,968,750 (5,937,500 x 50%)
Supplies 8,750,000 Gain on Sale of Machinery 156,250
Machinery 5,937,500
Overheads 6,875,000 Initial investment.
Depreciation 1,750,000
P23,125,000 Cash in JO 9,375,000
Cash 9,375,000
Cost of FG inventory (16,875,000)
Additional investment.
Work-in-Process, 12/31/18 P6,250,000
BOTH OPERATORS:
Receipts and Payments for year ended December 31,
2018: Machinery in JO 1,250,000 (2,500,000 x 50%)
Supplies in JO 625,000 (1,250,000 x 50%)
WIP in JO 3,125,000 (6,250,000 x 50%)
Receipts: Inventory 8,437,500 (16,875,000 x 50%)
Operating Exp. In JO 312,500
Original contributions P6,250,000 Accrued wages in JO 62,500
Additional contributions 18,750,000 A/P in JO 468,750
Cash in JO 12,343,750
Work-in-Process, 12/31/18 25,000,000 Accumulated Dep. in JO 875,000
Results of operation in JO.
Payments:

Machinery (1/2/18) P2,500,000


Wages 5,625,000
Supplies 9,375,000
Overheads 6,562,500
Operating expenses 625,000 24,687,500
Closing cash balance P312,500

Assets and liabilities at December 31, 2018

Assets:

Cash P312,500
Machinery P8,750,000
Accum/Dep (1,750,000) 7,000,000
Supplies 1,250,000
Work-in process 6,250,000
Total Assets P14,812,500

Liabilities:

Accrued wages P125,000


Accounts payable 937,500
P1,062,500
Net Assets P13,750,000

Each operator depreciates machinery at 20% per annum


on cost.
Problem 2 – JOINT VENTURE – INCORPORATED ENTITY SOLUTION:
SHARING PROFITS TO VENTURERS.
1.
On January 1, 2018, ALTOMATIC Corp. signed a joint
venture agreement with another venturer, LOCKWOOD Investment in JV 1,562,500
Cash 1,562,500
Inc. for the production of CDs. JOINT VENTURE Initial investment.
COMPANY, is established to carry on the business
venture, with each venturer contributing P1,562,500 for Cash 24,000 (48,000 x 50%)
equal shares in the company’s 250,000 P12.50 par value Investment in JV 24,000
Share in Dividend income
shares. They will share profits equally.
Investment in JV 71,875 (143,750 x 50%)
On December 31, 2018, the financials of JOINT VENTURE Profit from JV 71,875
Share in Net income
COMPANY follow:
TOTAL INVESTMENT IN JV : P1,610,375
COMBINED STATEMENT OF INCOME AND RETAINED
EARNINGS
2.
Revenues 625,000 COMBINED STATEMENT OF INCOME AND RETAINED
Expenses (481,250) EARNINGS (VENTURER)
Net income 143,750
Retained earnings, Jan 1, 2018 Revenues P13,500,000
Cash dividend paid (48,000) Expenses (11,600,000)
Retained earnings, Dec 31, 2018 95,750 Profit from own operations 1,900,000
Profit from JV 71,875
BALANCE SHEET Total 1,971,875
Retained earnings, Jan 1, 2018 1,150,000
Cash P64,500 Liabilities P906,250
Retained earnings, Dec 31, 2018 P3,121,875
Accounts receivable 500,000 Share capital 3,125,000
Inventory 781,250 Retained earnings 95,750
PPE 2,937,500 Share in JV ASSETS, 01/01/2018 : P4,127,000 / 2 = P2,063,500
Accum Depreciation (156,250) Share in JV LIABILITIES, 01/01/2018 : P406,250 / 2 = 453,125
Total P4,127,000 Total P4,127,000 NET ASSETS: P 1,610,375

The financial statements of ALTOMATIC Corp., one of the BALANCE SHEET


venturers, for the same period follow:
Cash P661,500 Liabilities P1,050,000
Accounts receivable 600,000 Share capital 3,750,000
Revenues P13,500,000 Inventory 1,050,000 Retained earnings 3,121,875
Expenses (11,600,000) PPE 4,875,000
Accum Depreciation (875,000)
Profit 1,900,000 Investment in JV 1,610,375
Share capital 3,750,000 Total P7,921,875 Total P7,921,875
Retained Earnings 1,150,000
Liabilities 1,050,000
Totals P7,850,000

Cash P661,500
Accounts receivable 600,000
Inventory 1,050,000
Plant, Property, and Equipment 4,875,000
Accumulated Depreciation (875,000)
Investment in Joint Venture 1,538,500
Totals P7,850,000

Required:
1. Prepare journal entries in the books of ALTOMATIC
Corporation using the Equity Method.
2. Prepare the financial statements for 2018 for
ALTOMATIC CORPORATION.
Problem. 3
JOINT VENTURE – THE VENTURER IS AN SME. FAIR VALUE MODEL

1. On January 1, 2018 SME J acquired 25% of the 1. Investment Cost


equity of L CORPORATION for P128,000. SME J Investment in JV 128,000
shares in the joint control over the relevant Cash 128,000
activities of the joint venture in relation to its
2. Transaction Cost
operations. Transaction costs of 2% of the purchase Profit and Loss 2,560
price of the shares were incurred by SME J. Cash 2,560
2. On December 15, 2018 L CORPORATION declared
and paid cash dividends of P18,000. 3. Cash Dividend
3. For the year ended December 31, 2018, L Dividend Receivable 4,500
CORPORATION recognized a profit of P60,000. Profit or Loss 4,500
4. Published price quotations do no exist for the shares
4. Share of Net Profit
of L CORPORATION. Using appropriate valuation
N/A
techniques SME J determined the fair value of its
investments in L CORPORATION at December 31, 5. Fair Value Revaluation
2018 as P140,000. Costs to sell are estimated at Investment in JV 12,000
5% of the fair value of the investment. SME J does Profit or Loss 12,000
not prepare consolidated financial statements
because it does not have any subsidiary (ies). 6. Impairment Loss
NONE
Required: Carrying Amount: P128,000 LOWER (FV adj)
Prepare appropriate journal entries in the books of SME J FAIR VALUE: P140,000 (140,000 x 100%)
for the L CORPORATION under each of the three (3)
TOTALS:
methods. Profit and Loss: P13,940
Investment in JV: P140,000

COST MODEL

1. Investment Cost EQUITY METHOD


Investment in JV 128,000
Cash 128,000 1. Investment Cost
Investment in JV 128,000
2. Transaction Cost Cash 128,000
Investment in JV 2,560
Cash 2,560 2. Transaction Cost
Investment in JV 2,560
3. Cash Dividend Cash 2,560
Dividend Receivable 4,500
Profit or Loss 4,500 3. Cash Dividend
Dividend Receivable 4,500
4. Share of Net Profit Investment in JV 4,500
N/A
4. Share of Net Profit
5. Fair Value Revaluation Investment in JV 15,000
N/A Profit or Loss 15,000
6. Impairment Loss 5. Fair Value Revaluation
NONE N/A
Carrying Amount: P130,560 LOWER
FV less Cost to Sell: P133,000 (140,000 x 95%) 6. Impairment Loss
Profit or Loss 8,060
TOTALS: Investment in JV 8,060
Profit and Loss: P4,500
Investment in JV: P130,560
Carrying Amount: P141,060 HIGHER
FV less Cost to Sell: P133,000 (140,000 x 95%)

TOTALS:
Profit and Loss: P6,940
Investment in JV: P133,000