Problem I

1.
Oil Pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000,000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000,000

Oil Pipeline operating expenses (30% x P12,000,000). . . . . . . . . . . . . . 3,600,000

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600,000

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,940,000
Revenue from Oil Pipeline (30% x P19,800,000) . . . . . . . . . . . . . . . . 5,940,000

Amortization expense – pipeline (P18,000,000/20 years). . . . . . . . . . . 900,000

Accumulated depreciation – oil pipeline. . . . . . . . . . . . . . . . . . . . . 900,000

Thus, the share of X Inc. in net income of the joint operations would be as follows:
Proportionate Total (100%
Share (30%) based)
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 5,940,000 P19,800,000
Less: Operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600,000 12,000,000
Amortization expense: P18,000,000 ( 30%) / 20 years. . . . . . . . 900,000
P60,000,000 (100%) / 20 years. . . . . . . . _3,000,000
Net Income of the Joint Operation. . . . . . . . . . . . . . . . . . . . . . . . . . . . P 4,800,000
Multiplied by: 30% interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __________ ______30%
Net Income of X. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 1,440,000 P 1,440,000

Problem II
1. The following journal entries would be recorded:
Pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000,000
Steel Pipes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,200,000
Gain on steel pipes (70%* of gain). . . . . . . . . . . . . . . . . . . . . . . . . . . 3,360,000
Unrealized gain – contra account (30% of gain, P4,800,000) . . . . 1,440,000
The following should be observed in relation to the above journal entry:
• X should recognize a gain of P3,360,000 [70% x (P18,000,000 – P13,200,000)]*
• A portion of the gain can be recognized on the contribution of assets to a joint operation.
PFRS 11 indicates the following:
When an entity enters into a transaction with a joint operation in which it is a joint operator, such as a sale
or contribution of assets, it is conducting the transaction with the other parties to the joint operation and,
as such, the joint operator shall recognize gains and losses resulting from such a transaction only to the
*extent of the other parties’ interests in the joint operation. When such transactions provide evidence of a
reduction in the net realizable value of the assets to be sold or contributed to the joint operation, or of an
impairment loss of those assets, those losses shall be recognized fully by the joint operator.
• A gain can be recognized when the significant risks and rewards have been transferred.
Pipeline operating expenses (30% x P12,000,000). . . . . . . . . . . . . . . . . 3,600,000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600,000

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,940,000
Revenue from Pipeline (30% x P19,800,000) . . . . . . . . . . . . . . . . . . . 5,940,000
Amortization expense – pipeline (P18,000,000/20 years). . . . . . . . . . . 900,000
Accumulated depreciation - pipeline. . . . . . . . . . . . . . . . . . . . . . . 900,000

Unrealized gain – contra account (P1,440,000/ 20 years). . . . . . . . . . 72,000

Amortization expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000
The following should be observed in relation to the above journal entry:
• The joint operator’s own interest in the gain is recognized over the life of the asset.
 • The unrealized gain is a contra account to the pipeline account; it should not be reported as a deferred gain
on the liability side of the balance sheet. When X Inc., prepares a balance sheet, the unrealized gain will be
offset against the pipeline such that the pipeline’s net cost is P16,560,000 (P18,000,000 – P1,440,000). As
the net cost of the pipeline is being amortized, the unrealized gain account is also being amortized. In
effect, the unrealized gain is being brought into income over the life of the pipeline. As the pipeline is being
used to generate revenue on transactions with outsiders, the operator’s own share of the unrealized gain is
being recognized in net income. This is similar to what happened in Chapter 18 (Intercompany Sales of
Property and Equipment) of Volume II, when the unrealized profits from an intercompany sale of a
depreciable asset were realized over the life of the depreciable asset.

Thus, the share of X Inc. in net income of the joint operation would be as follows:
Revenue (30% x P19,800,000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 5,940,000
Less: Operating expenses (30% x P12,000,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600,000
Amortization expense: P60,000,000 x 30% = P18,000,000 / 20 years. . . . . . . . . . . 900,000
Add: Gain on steel pipes [70%* x (P18,000,000 – P13,200,000)] . . . . . . . . . . . . . . . . . 3,360,000
Realized gain – amortization**(P1,440,000/20 years). . . . . . . . . . . . . . . . . . . . . . . _____72,000
Net Income of X. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 4,872,000
*
PFRS 11 states that: “When an entity enters into a transaction with a joint operation in which it is a joint operator, such as a sale or
contribution of assets, it is conducting the transaction with the other parties to the joint operation and, as such, the joint operator shall
recognize gains and losses resulting from such a transaction only to the *extent of the other parties’ interests in the joint operation.”
** Sales price of P18,000,000 – P13,200,000, cost of steel pipes = P4,800,000 x 30% = P1,440,000

2. refer to the above entry

Gain on steel pipes (70%* of gain). . . . . . . . . . . . . . . . . . . . . . . . . . . P3,360,000
Unrealized gain – contra account (30% of gain, P4,800,000) . . . . P1,440,000

3.
Amortization expense – pipeline (P18,000,000/20 years). . . . . . . . . . . P 900,0000
Less: Amortization expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____72,000
Amortization expense for the year………………………………………… P 828,000

4.
Pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P18,000,000
Less: Net unrealized gain, end of 20x4:
Unrealized gain – contra account (30% of gain, P4,800,000) . . P1,440,000
Less: Amortization for 20x4…………………………………………… ____72,000 __1,368,000
Net cost of Oil Pipeline………………………………………………………. P16,632,000

Problem III
1.
• Contributions of cash by the operators
Cash 360,000
KK Company 180,000
Cerise Company 180,000
Contribution by joint operators.

• Use of cash and loan to buy machinery & equipment and raw materials
Machinery and equipment 96,000
Cash 60,000
Loans payable – machinery and equipment 36,000
Contribution by joint operators.
 Materials 78,000
Accounts payable 78,000
Acquisition of materials.

• Payment of wages (and salaries):

Wages (and salaries) 86,400
Cash 84,000
Accrued payroll 2,400
Annual labor.

• Loans from the bank

Cash 72,000
Bank loans payable 72,000
Amount borrowed.

• Repayment of loan – machinery and equipment and other factory expenses

Loan payable – machinery and equipment 12,000
Cash 12,000
Partial payment of loan.

Accounts payable 50,400

Cash 50,400
Payment of trade creditors.

Factory overhead control – heat, light and power 156,000

Cash 156,000
Payment of manufacturing expenses such as heat, light and power.

• Depreciation of machinery and equipment

Factory overhead control – depreciation 9,600
Accumulated depreciation 9,600
Depreciation of equipment.

• Transfer of materials, labor and overhead to Work-in-Process

Work-in-process 309,600
Wages (and salaries) 86,400
Materials 57,600
Factory overhead control – heat, light and power 156,000
Factory overhead control – depreciation 9,600
Allocation of costs to work-in-process

• Transfer of Work-in-Process to Finished Goods Inventory.

Finished goods 216,000
Work-in-process 216,000
Allocation to finished goods

• Transfer of Finished Goods Inventory to Joint Operators throughout the year

KK Company 96,000
DD Company 96,000
Finished goods 192,000
Delivery of output to joint operators.
 2.
Cash
Contribution – Drei 180,000 Work-in-Process
60,000 Machinery and equipment
3. Labor 86,400 216,000
Contribution – Cerise 180,000 84,000 Labor to Finished Goods
Materials 57,600 a.
Bank loan 60,000 12,000 Machinery and equipment
Factory Overhead – heat, etc. 156,000 50,400 Accounts payable
Factory Overhead – depreciation 9,600 156,000 Factory overhead control
Balance,
Balance, 12/31/x4
12/31/x4 93,600
57,600
Total assets, P282,000
b. KK’s investment, P84,000
c. DD’s investment, P84,000
December 31, 20x4
Assets
Current Assets
Cash P 57,600
Finished goods inventory 24,000
Work-in-Process inventory 93,600
Materials inventory 20,400
Total current assets P 195,600
Non-current Assets
Equipment P 96,000
Less: Accumulated depreciation 9,600 86,400
Total Assets P282,000
Liabilities and Net Assets
Current Liabilities
Accrued payroll P 2,400
Accounts payable 27,600 P 30,000
Non-current Liabilities
Bank loan payable P 60,000
Loan payable – machinery and equipment 24,000 __84,000
Total Liabilities P 114,000
Net Assets 168,000
Total Liabilities and Net Assets P282,000

Joint Operator’s Equity

KK Company: Contributions – January 1, 20x4 P 180,000
Cost of inventory distributed ( 96,000) P 84,000

DD Company: Contributions – January 1, 20x4 P 180,000

Cost of inventory distributed ( 96,000) P 84,000
Total Joint Operator’s Equity P168,000