CHAPTER TWO-JOINT VENTURES

Characteristics and Historical Background

Joint venture differs from a partnership in that it is limited to carrying
out a single project such as, production of a motion picture or
construction of a building or dam.
Historically, joint ventures were used to finance the sale or exchange of a
cargo or merchandise in a foreign country. In an era when marine
transportation and foreign trade involved may hazards, individuals
(venturers) would band together to undertake a venture of this type. The
capital required usually was larger than one person could provide, and
the risks were too high to be borne alone. Because of the risks involved
and the relatively short duration of the project, no net income was
recognized until the venture was completed. At the end of the voyage, the
net income or net loss was divided among venturers, and their
association was ended.
In this traditional form,
 Accounting for joint venture did not follow the accrual basis
 Net income not determined at regular intervals
 Measurement and reporting of net income or loss awaited
completion of the venture
In today’s business community, joint ventures are less common but still
employed for many projects such as:
 The acquisition, development, and sale of real property
 Exploration for oil and gas
 Construction of bridges, buildings, and dams

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Accounting for a Joint Venture
Accounting for a Corporate or LLC Joint Venture
Corporate joint venture refers to a corporation owned and operated by a
small group of businesses (the joint venturers) as a separate and specific
business or project for the mutual benefit of the members of the group. A
government may also be a member of the group. An entity which is a
subsidiary of one of the joint venturers is not a corporate joint venture.
According to the Accounting Principles Board, investors should account
for investments in common stock of corporate joint ventures by the
equity method in consolidated financial statements.
Arguments for establishing a separate set of accounting records for every
corporate joint venture of large size and long duration are:
 The complexity of modern business
 The emphasis on good organization and strong internal control
 The importance of income taxes
 The extent of government regulation
In the stockholders’ equity accounts of the joint venture, each venturer’s
equity account is credited for the amount of cash or non cash asset
invested. The accounting records of such a corporate joint venture
include the usual ledger accounts for assets, liabilities, stockholders’
equity, revenue, and expenses. The entire accounting process should
conform to generally accounting practices, from the recording of
transactions to the preparation of financial statements.
Accounting for an Unincorporated Joint Venture
Because the investor-venturer in an unincorporated joint venture owns
an undivided interest in each asset and is proportionately liable for its
share of each liability, the provisions of APB may not apply in such
cases. Investors in unincorporated joint ventures have, thus, the option
of using either the equity method of accounting or a proportionate share
method of accounting for the investments.

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Illustration: assume that A Company and B Company each invested Br.
400,000 for a 50% interest in unincorporated joint venture in January
19X9. Condensed financial statements for AB Company for 19X9 were as
follows:
AB Company (A joint venture)
Income Statement
For the Year Ended December 31, 19X9
Revenue 2,000,000
Less: Cost and Expenses 1,500,000
Net Income 500,000
Division of net income
A Company 250,000
B Company 250,000
Total 500,000

AB Company (A joint venture)

Statement of Venturer’ Capital
For the Year Ended December 31, 19X9

A Company B Company Combined

Investment, Jan. 2 400,000 400,000 800,000
Add: Net income 250,000 250,000 500,000
Venturers’ Capital,
End of Year 650,000 650,000 1,300,000

AB Company (A joint venture)

Balance Sheet
December 31, 19X9

Assets
Current Assets 1,600,000
Other Assets 2,400,000
Total Assets 4,000,000

Liabilities & Venturers’ Capital

Current Liabilities 800,000
Long term Debt 1,900,000
Venturers’ Capital:
A Company 650,000
B Company 650,000 1,300,000
Total Liabilities & Capital 4,000,000

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Under the equity method of accounting, both A Company and B
Company prepare the following journal entries for the investment in the
AB Company:
1999
Jan 2 Investment in AB Company (Joint Venture) 400,000
Cash 400,000
To record investment in joint venture

Dec 31 Investment in AB Company (Joint Venture) 250,000

Investment Income 250,000
To record share of AB Company net income (500,000*.5)

Under the proportionate share method of accounting, in addition to

the foregoing journal entries, both A Company and B Company prepare
the following journal entry for their respective shares of the assets,
liabilities, revenue, and expenses of AB Company:
1999
Dec 31 Current Assets (50%) 800,000
Other Assets (50%) 1,200,000
Costs and Expenses (50%) 750,000
Investment Income 250,000
Current Liabilities (50%) 400,000
Long term Debt (50%) 950,000
Revenue (50%) 1,000,000
Investment in AB Co (Joint Venture) 650,000
To record proportionate share of joint venture’s assets, liabilities,
revenue, and expenses.

Use of the equity method of accounting for unincorporated joint ventures

is consistent with APB Opinion No. 18 but information on material assets
and liabilities of a joint venture may be relegated to a note to financial
statements resulting in off-balance sheet financing. The proportionate
share method of accounting for unincorporated joint ventures avoids the
problems of off-balance sheet financing but has the questionable practice
of including portions of assets such as plant assets in each venturer’s
balance sheet.

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