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Chapter 6
Joint Arrangements
PROBLEM 1: TRUE OR FALSE
1. TRUE
2. FALSE – only the parties that have joint control
3. TRUE
4. FALSE – joint operation
5. TRUE
6. FALSE – joint operation
7. FALSE – joint operators
8. FALSE
9. FALSE – equity method is applied to joint venturer’s interest
10. FALSE – as return of capital (i.e., deduction to the investment)

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. C
2. C
3. A
4. B
5. D
6. D
7. B
8. C
9. C
10. B
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PROBLEM 3: EXERCISES
1. Solutions:

I. No separate books

(a) Journal entries:

Books of A Books of B Books of C
a. Joint operation 420 Joint operation 420 Joint operation 420
Inventory 400 Payable to A 420 Payable to A 420
Cash 20
b. Joint operation 400 Joint operation 400 JO – Cash 400
Payable to B 400 Cash 400 Payable to B 400
c. Joint operation 100 Joint operation 100 Joint operation 500
Payable to C 100 Payable to C 100 JO – Cash 400
Accts. payable 100
d. Receivable Receivable JO - Cash 1,600
from C 1,600 from C 1,600 Joint
Joint operation 1,600 Joint operation1,600 operation 1,600
e. Joint operation 110 Joint operation 110 Joint operation 110
Payable to C 110 Payable to C 110 Cash 110

(b) Joint operation profit or loss:

Joint Operation
(a) Mdse. contribution of A 420
(c) Purchases 500 1,600 (e) Sales
(f) Expenses 110 60 Unsold merchandise
630 Credit balance - Profit

(c) Cash settlement:

Joint Operation – A Joint Operation – B

(a) 420 (b) 400
P/L (630 ÷ 3) 210 P/L (630 ÷ 3) 210
Receipt 630 Receipt 610

Joint Operation – C
(c) 100
(f) 110
P/L (630 ÷ 3) 210 60 EI
Net Receipt 360
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Optional reconciliation:
JO-Cash (held by C)
(b) 400 400 (c)
(d) 1,600
Balance before distribution 1,600
630 Payment to A
610 Payment to B
Balance retained by C 360

II. Separate books

(a) Journal entries:

Books of A Books of B Books of C
a. Joint operation 420
Inventory 400
Cash 20
b. Joint operation 400
Cash 400
c. Joint operation 100
Accts. payable 100
d.

e. Joint operation 110

Cash 110

JO Books
a. Inventory 420
A, Capital 420
b. Cash 400
B, Capital 400
c. Purchases 500
Cash 400
C, Capital 100
d. Cash 1,600
Sales 1,600
e. Expenses 110
C, Capital 110
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(b) Joint operation profit or loss

Sales 1,600
COGS:
Inventory, beg 420
Purchases 500
TGAS 920
Inventory, end. (60) (860)
Gross profit 740
Expenses (110)
Profit before mgmt. fee & bonus 630

(c) Cash settlement:

A, Capital B, Capital
420 (a) 400 (b)
210 P/L (630 ÷ 3) 210 P/L (630 ÷ 3)
630 Receipt 610 Receipt

C, Capital
100 (c)
110 (e)
EI 60 210 P/L (630 ÷ 3)
360 Net Receipt

2. Solution:

Investment in Joint Venture

Initial investment 1,000,000
240,000 Sh. in loss (720K x 33 1/3%)
760,000 12/31/x1
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PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. B 1M own + (50% share in joint operation’s revenues of 400K)

= 1.2M

2. B
Solution:
Joint operation
Merchandise-A 8,500 20,400 Cash sales-C
Merchandise-B 7,000 4,200 Cash sales-C
Freight-in-C 200 1,210 Merchandise-B (withdrawal)
Purchases-C 3,500 540 Unsold mdse. charged to A
Selling expenses-C 550
6,600 Profit - excess credit

3. A
Solution:
Joint operation - A
Merchandise - A 8,500
P/L (6,600 x 20%) 1,320 540 Unsold mdse. charged to A
9,280 Receipt

4. C
Solution:
Joint Operation
Contributions (100 + 120 + 80) 300
Expenses (paid from JO cash) 240 ? Sales
360 Bal. before closing (100 + 120 - 580)

Joint Operation
Contributions (100 + 120 + 80) 300
Expenses (paid from JO cash) 240 900 Sales (squeeze)
360 Bal. before closing (100 + 120 - 580)
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5. B
Solution:
Step 1: Compute for the profit or loss

Joint Operation
Contributions (100 + 120 + 80) 300
Expenses (paid from JO cash) 240 900 Sales
60 Unsold inventory
420 Profit before salary and bonus

Step 2: Allocate the profit or loss

Easy Average Difficult Total
Profit before salary and bonus 420
Allocation:
1. Salary 6 6
2. Bonus (A) 54 54
3. Allocation of remaining profit
(420K – 6K – 54K) = 360K; (360K ÷ 3) 120 120 120 360
As allocated 120 120 180 420

(A)

Profit before salary and bonus 420

Difficult’s salary (6)
Difficult’s bonus (B) (54)
Profit after salary and bonus 360

(420 – 6) = 414 profit after salary but before bonus;

(B)

P
B = P -
1 + Br
B = 414 – (414 ÷ 1.15%) = 54

Step 3: Make T-account

Joint Operation – Difficult

Contribution 80
P/L 180 60 Unsold inventory
Net Receipt 200
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6. B
Solution:
Step 1: Compute for the profit or loss
Joint operation
Purchases – A 100 120 Sales - A
Purchases – B 80 60 Sales - B
Expenses – A 200 10 Other income - B
Loss - debit balance 190

Step 2: Allocate the profit or loss

Allocation to: A B Totals

Loss during the year (190)
Commission on purchases:
(10% x 100) – A 10 (10)
(10% x 80) – B 8 (8)
Commission on sales:
(20% x 120) – A 24 (24)
(20% x 60) – B 12 (12)
Loss to be allocated equally (244)
Allocation: (244 ÷ 2) (122) (122) 244
Net share - as allocated (88) (102) -

Step 3: Make T-accounts

Joint operation - A
Purchases 100 120 Collections on sales
Expenses 200 88 Net share in loss
Cash settlement - receipt 92

Joint operation – B
Purchases 80 102 Net share in loss
60 Collections on sales
10 Collections on other income
92 Cash settlement - payment
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7. D
Solution:

Joint operation
Debit balance 5
17 Unsold merchandise (squeeze)
12 Profit - credit balance (₱4 x 3)

8. A
Solution:
Joint operation
Debit balance (squeeze) 7
18 Unsold merchandise
11 Profit - credit balance

9. D
Solution:

Step 1: Compute for the profit or loss

Joint Operation
Account with A 4 14 Account with C
Account with B 12 22 Unsold merchandise
20 Profit – credit balance

Step 2: Allocate the profit or loss

A B C Total
Profit 20
Allocation:
1. Bonus (20 x 10%) 2 2
3. Allocation of remaining profit
(20 – 2 = 18; (18 ÷ 3) 6 6 6 18
As allocated 8 6 6 20
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Step 3: Make T-accounts

Joint Operation – A Joint Operation – B

Payable to A 4 Payable to B 12
P/L 8 22 Unsold inventory P/L 6
10 Payment Receipt 18

Joint Operation – C
14 Receivable from C
P/L 6
8 Payment

10. B
Solution:

Joint Operation
Account with C 6.5 2.5 Account with A
4 Account with B
0 Profit

Joint Operation – A Joint Operation – B

2.5 Receivable from A 4 Receivable from B
P/L 0 P/L 0
2.5 Payment 4 Payment

Joint Operation – C
Payable to C 6.5
P/L 0
Receipt 6.5
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PROBLEM 5: FOR CLASSROOM DISCUSSION

Case 1: No separate records are maintained

1. Requirements:
a. Prepare the journal entries for transactions (a) to (f).
b. Compute for the profit after management fee and bonus.
c. Determine the cash settlements to the joint operators.

Solution:
Requirement (a): Journal entries

* No entries because the cash used on the purchase and freight-in are already
reflected in Small’s and Medium’s books under entries (a) and (c).

** “Receivable from Large” is credited because, by paying the expenses out of

the JO-Cash, Large’s cash accountability is reduced.

Requirement (b): Profit after management fee and bonus

Joint Operation
(b) Mdse. contribution of Med. 120K
(c) Purchases 180K 900K (e) Sales
(f) Expenses 240K 60K Unsold merchandise (1)
420K Profit before fee & bonus

(1) (160K purchases + 20K freight-in) x 1/3 = 60K

Profit before management fee and bonus 420,000

Large's management fee (6,000)
Large's bonus (2) (54,000)
Profit after management fee and bonus 360,000
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(2)(420,000 – 6,000) = 414,000 profit after management fee but before bonus;
P
B = P -
1 + Br
B = 414,000 – (414,000 ÷ 1.15%) = 54,000

Shortcut: (420,000 – 6,000) = 414,000 ÷ 115% = 360,000

Requirement (c): Cash settlement

Step 1: Allocate the profit or loss

Small Medium Large Total
Profit before salary and bonus 420K
Allocation:
1. Salary 6K 6K
2. Bonus (see requirement ‘b’) 54K 54K
3. Allocation of remaining profit
(420K – 6K – 54K) = 360K; (360K ÷ 3) 120K 120K 120K 360K
As allocated 120K 120K 180K 420K

Step 2: Make T-accounts

Joint Operation – Small Joint Operation – Medium

Contribution 100K Contribution 120K
P/L 120K P/L 120K
Receipt 220K Receipt 240K

Joint Operation – Large

Contribution 80K
P/L 180K 60K Unsold inventory (see requirement ‘b’)
Receipt 200K

❖ Checking:
JO – Cash
Cash contribution of Small 100K 180K Purchases & freight-in
Cash contribution of Large 80K 240K Expenses paid out of JO-Cash
Sales 900K 220K Cash settlement to Small
240K Cash settlement to Medium
200K Balance retained by Large
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Alternative solution:
Payable to S (in M’s & L’s books) Payable to M (in S’s & L’s books)
100K (a) 120K (b)
120K P/L 120K P/L
220K Receipt 240K Receipt

Payable to L (in S’s & L’s books) Receivable from L (in S’s & M’s books)
80K (c) (e) 900K
EI 60K 180K P/L 240K (f)
200K Receipt Payment 660K

* 660K payment – 200K receipt = 460K payment to Small and Medium

(i.e., 220K and 240K, respectively)

❖ In the settlement, Large pays Small ₱220,000 and Medium

₱240,000, and retains the remaining ₱200,000 JO-Cash.

Case 2: Separate records are maintained

2. Requirements:
a. Prepare the journal entries for transactions (a) to (f).
b. Compute for the profit after management fee and bonus.
c. Determine the cash settlements to the joint operators.

Requirement (a): Journal entries

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Requirement (b): Profit after management fee and bonus

Sales 900,000
COGS:
Inventory, beg. 120,000
Purchases & freight-in 180,000
TGAS 300,000
Invty., end. (160K + 20K) x 1/3 (60,000) (240,000)
Gross profit 660,000
Expenses (240,000)
Profit before mgmt. fee & bonus 420,000

Profit before management fee and bonus 420,000

Large's management fee (6,000)
Large's bonus (2) (54,000)
Profit after management fee and bonus 360,000

(2)(420,000 – 6,000) = 414,000 profit after management fee but before bonus;
P
B = P -
1 + Br
B = 414,000 – (414,000 ÷ 1.15%) = 54,000

Requirement (c): Cash settlement

Joint Operation – Small Joint Operation – Medium

Contribution 100K Contribution 120K
P/L 120K P/L 120K
Receipt 220K Receipt 240K

Joint Operation – Large

Contribution 80K
P/L 180K 60K Unsold inventory (see requirement ‘b’)
Receipt 200K
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PL: Small Medium Large Total

Profit before salary and bonus 420K
Allocation:
1. Salary 6K 6K
2. Bonus (see requirement ‘b’) 54K 54K
3. Allocation of remaining profit
(420K – 6K – 54K) = 360K; (360K ÷ 3) 120K 120K 120K 360K
As allocated 120K 120K 180K 420K

Alternative solution:
Small, Capital Medium, Capital
100K (a) 120K (b)
120K P/L 120K P/L
220K Receipt 240K Receipt

Large, Capital
80K (c)
EI 60K 180K P/L
200K Receipt

3. Solution:

Investment in Joint Venture

Initial investment 220,000
Sh. in profit (800K x 40%) 320,000 200,000 Dividends (500K x 40%)

340,000 12/31/x1
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PROBLEM 6: MULTIPLE CHOICE – PFRS FOR SMEs

1. D
2. A
3. B
4. D
5. C
6. B
7. D
Solution:
20x1 20x2 20x3
Cost (100K + 1K transaction cost) 101,000 101,000 101,000
Fair value 102,000 110,000 90,000
Costs to sell (4,000) (4,000) (4,000)
Fair value less costs to sell 98,000 106,000 86,000
Measurement - lower amount 98,000 101,000 86,000

8. E – at the year-end fair values given in the problem, excluding

costs to sell.

9. C
10. D