THEORIES

1. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when
decisions about the relevant activities require the ___________ of the parties sharing control.

A. Highest level of professionalism C. Collective judgement

B. Unanimous consent D. Unbiased decisions

2. The objective of IFRS 11 is to ______________ by entities that have an interest in joint arrangements.

A. Regulate accounting policy to be applied C. Achieve uniformity in accounting policies used

B. Establish principles for financial reporting D. Unify the accounting techniques used

3. What entities shall apply IFRS 11?

A. Only those entities that have joint control over a joint arrangement
B. Only those entities that have significant influence over a joint arrangement
C. Only those entities that are a party to a joint arrangement
D. All of the above

4. Which is a characteristic of a joint arrangement?

a. The parties are bound by a contractual arrangement

b. The contractual arrangement gives two or more parties joint control over the arrangement
c. The parties are bound by a contractual arrangement which gives two or more parties absolute control over the
arrangement
d. The parties are bound by a contractual arrangement which gives two or more parties joint control over the
arrangement

5. A joint arrangement can be either a _________________.

A. Joint venture or joint subsidiary C. Joint operation or joint entity

B. Joint operation or a joint venture D. Joint entity or joint subsidiary

PROBLEMS

1. On January 1, 2018, two real estate companies, the Paw Company and Fur Company, set up a separate
vehicle, the Meow Company, for the purpose of acquiring a shopping center. The contractual arrangement
 between the parties establishes joint control of the activities that are conducted in Meow Company. The main
feature of Meow’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, Paw Company paid ₱1.6 million for 50,000 shares of Meow’s voting common stock, which
represents a 40% investment. No allocation to goodwill or other specific account was made. The joint control
over Meow is achieved by this acquisition and so Paw Company applies the equity method. Meow Company
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 Meow account found in Paw’s financial records as of December 31, 2018?

a. ₱1,724,000 c. ₱1,844,000
b. ₱1,784,000 d. ₱1,884,000

SOLUTION:

2. On January 1, 2019, Isopropyl, Inc. and Ethyl, Inc. (the parties) agreed to combine their businesses by
establishing a separate vehicle (Alcohol, Inc.). Both parties expect the arrangement to benefit them in
different ways. Isopropyl believes that the arrangement could enable it to achieve its strategic plans to
increase its size, offering an opportunity to exploit its full potential for organic growth through an enlarged
offering of products and services. Ethyl, Inc. expects the arrangement to reinforce its business opportunities
by marketing more products.
As a result, Isopropyl, Inc. acquired 20% of the outstanding common stock of Alcohol, Inc. for ₱700,000.
This investment gave Isopropyl the joint controls over Alcohol, Inc. Alcohol’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 2019, Alcohol, Inc. reported net income of ₱170,000. In 2020, Alcohol 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
Isopropyl’s investment in Alcohol, Inc. at December 31, 2020?

a. ₱728,000 c. ₱756,000
b. ₱748,000 d. ₱776,000

3. Purr Company reports net income of ₱140,000 each year and pays an annual cash dividend of ₱50,000. The
company holds net assets of ₱1,200,000 on January 1, 2016. On that date, Feline Company purchases 40% of
the outstanding stock for ₱600,000, which gives it the ability to have joint control with Catto Company over
Purr. At the purchase date, the excess of Feline’s cost over its proportionate share of Purr’s book value was
assigned to goodwill. On December 31, 2020, what is the investment in Purr Company balance (equity
method) in Feline’s financial records?

a. ₱600,000 c. ₱690,000
b. ₱660,000 d. ₱708,000
4. Using the same information in No. 3, except that Purr Company’s ownership structure is as follows:
75% is needed to direct relevant activities;
50% ownership of Feline Company;
25% ownership of Catto Company; and
25% ownership of Munchkin Company

What is the amount of Income from the investment in Purr Company in Feline financial records as of
December 31, 2020?

a. ₱168,000 c. ₱70,000
b. ₱108,000 d. ₱56,000

5. On January 1, 2031, Calico Company and Tabby Corp. each acquired 30% of the ordinary shares that carry
voting rights at a general meeting of shareholders of Ragdoll Co. for ₱300,000. Calico and Tabby immediately
agreed to share control over Ragdoll.
For the year ended December 31, 2031, Ragdoll Co. recognized a profit of ₱400,000. On December 30, 2031,
Ragdoll declared and paid a dividend of ₱150,000 for the year 2031. On December 31, 2031, the fair value of
each venturer’s investment in Ragdoll is ₱425,000. However, there is no published price quotation for Ragdoll
Co.
In 2011, Calico Company purchased goods for ₱100,000 from Ragdoll Co. On December 31, 2031, ₱60,000 of
the goods purchased from Ragdoll were in Calico’s inventories (unsold goods by Calico). Ragdoll sells goods
at a 50% mark up on cost.
Calico Company and Tabby Corp. account for jointly controlled entities using the equity method.
Calico must recognize income from the jointly controlled entity for the year ended Dec. 31, 2031 amounted
to:
a. Nil or zero
b. ₱110,000
c. ₱114,000
d. ₱120,000