Big Picture

Week 4-5: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to

1. Compute the amount of settlement to the partners after liquidating the partnership
under lump-sum liquidation or installment liquidation

2. Apply the standards, principles and methods in accounting for joint operations and
joint venture transactions (IFRS 11)

Big Picture in Focus: ULO1. Compute the amount of settlement to the

partners after liquidating the partnership under lump-sum liquidation
or installment liquidation

Metalanguage
In this section, the most essential terms relevant to the study and demonstrate ULO4 will
be operationally defined to establish a common frame of refence as to how the texts work
in your chosen field or career. You will encounter these terms as we go through this unit.
Please refer to these definitions in case you will encounter difficulty in understanding
concepts.

Partnership – An association of two or more persons to carry-on as co-owners of a

business for profit

Partnership agreement – a written contract expressing the voluntary agreement of two

or more individuals in a partnership

Partners’ capital statement – the owners’ equity statement for a partnership which
shows the changes in each partner’s capital account and in total partnership capital
during the year

General partner – A partner who has unlimited liability for the debts of the firm

Limited partner – A partner whose liability for the debts of the firm is limited to that
partner’s investment in the firm

Partnership liquidation – an event that ends both the legal and economic life of a
partnership

Capital deficiency – a debit balance in a partner’s capital account after allocation of gain
or loss.

No capital deficiency – all partners have credit balances after allocation of gain or loss
Income ratio – the basis for dividing net income and net loss in a partnerhsip

Schedule of payments – a schedule showing the distribution of cash to the partners in

a partnership liquidation

Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes) for the first three (3) weeks
of the course, you need to fully understand the following essential knowledge that will be
laid down in the succeeding pages. Please note that you are not limited to exclusively
refer to the these resources. Thus, you are expected to utilize other books, research
articles and other resources that are available in the university’s library e.g. ebrary,
search.proquest.com etc.

PARTNERSHIP LIQUIDATION

 Partnership liquidation is the winding up of the partnership business. That is, it sells
all of its noncash assets, pays its liabilities, and makes a final liquidating distribution
to the remaining partners.

 Realization is the conversion of noncash assets into cash

 As a general rule, partnership assets should be distributed as follows:

1. To outside creditors
2. To partners for loan accounts
3. To partners for capital accounts

 When loans exist between the partnership and a partner, the capital account and the
loan(s) are combined to give a net amount. This is often referred to as the right of
offset. As a result of the exercise of right of offset, payment to some partners can be
made on their capital balances even if there are loans payable to the other partners

 Before any distribution may be made to the partners, liabilities to outside creditors
must be paid in full or the necessary funds may be placed in an escrow account.

 The total partner’s equity (interest) in the partnership include the balance of capital
account, loan to and from, drawing, and share in net income or loss.

 All gains or losses should be allocated according to profit and loss ratio

 Total loss includes

o Realized loss
o Unrealized loss
 o Cash withheld for future liquidation expenses
o Unrecorded liabilities

Total loss does not include cash set aside in a separate fund
 If after distribution of total loss, a partner has incurred a deficit, that is, his total equity
is less than his share in total loss; the deficient partner must pay the partnership the
amount of such deficiency. If he cannot pay, then the other partners have to bear his
deficiency in the partnership according to their profit and loss ratio.

 As a general rule, claims against the personal assets of the deficient partner is rank
in the following order:
o Personal creditors
o Partnership creditors
o Partners by way of contribution

 Methods of partnership liquidation:

o Lump-sum or total or single
o Installment

 The statement of partnership liquidation shows in detail all of the transactions

associated with the liquidation of the partnership

 The schedule of safe payments or cash distribution plan or cash priority program
shows to whom cash should be paid as cash becomes available and does not require
any separate computation every time installment payments are made to the partners
o The partner that has the highest loss absorption capacity is the first to receive
cash
o Loss absorption capacity refers to the partnership loss required to eliminate the
interest of a partner

SAMPLE PROBLEMS:

Problem 1 – The statement of financial position of KKK Partnership, just before

liquidation is as follows:

ASSETS LIABILITIES AND CAPITAL

Cash 50,000 Liabilities 70,000
Other Assets 140,000 Loan – Kemba 20,000
Loan – Kyrie 10,000 Kemba, Capital (50%) 30,000
Kawhi, Capital (30%) 50,000
Kyrie, Capital (20%) 30,000
 Total 200,000 Total 200,000

Partners Kemba and Kawhi are personally insolvent. The percentages in parenthesis are
their profit and loss ratio.

1. If non-cash assets are sold for P 150,000 and all liabilities are paid and liquidation
expense of P 5,000 are also paid, how much cash should Kemba, Kawhi, and Kyrie
receive?

Cash 150,000
Other Assets 140,000
Kemba, Capital (P 10,000 x 50%) 5,000
Kawhi, Capital (P 10,000 x 30%) 3,000
Kyrie, Capital (P 10,000 x 20%) 2,000

To record the sale of non-cash assets with the gain on sale allocated to the
partner’s capital balances based on their profit and loss ratio.

Kemba, Capital (P 5,000 x 50%) 2,500

Kawhi, Capital (P 5,000 x 30%) 1,500
Kyrie, Capital (P 5,000 x 20%) 1,000
Estimated Liquidation Expenses 5,000

To charge liquidation expenses to the capital balances of the partners

Liabilities 70,000
Estimated Liquidation Expenses 5,000
Cash 75,000

To record payment of liabilities to outside creditors and estimated liquidation

expenses for cash

Loan – Kemba 20,000

Kemba, Capital (P 30,000 + 5,000 – 2,500) 32,500
Kawhi, Capital (P 50,000 + 3,000 – 1,500) 51,500
Kyrie, Capital (P 30,000 + 2,000 – 1,000) 31,000
Loan – Kyrie 10,000
Cash 125,000

To record the settlement of partner’s loan and capital balances with the remaining
cash in the partnership
Amount received by partners

Kemba (P 32,500 + 20,000) 52,500

Kawhi 51,500
Kyrie (P 31,000 – 10,000) 21,000
 Total Cash Distributed 125,000

2. If non-cash assets are sold for P 50,000, liquidation expense of P 5,000 and all
liabilities are paid, how much cash should Kemba, Kawhi, and Kyrie receive?

Cash 50,000
Kemba, Capital (P 90,000 x 50%) 45,000
Kawhi, Capital (P 90,000 x 30%) 27,000
Kyrie, Capital (P 90,000 x 20%) 18,000
Other Assets 140,000

To record the sale of non-cash assets with the loss on sale allocated to the
partner’s capital balances based on their profit and loss ratio.

Kemba, Capital (P 5,000 x 50%) 2,500

Kawhi, Capital (P 5,000 x 30%) 1,500
Kyrie, Capital (P 5,000 x 20%) 1,000
Estimated Liquidation Expenses 5,000

To charge liquidation expenses to the capital balances of the partners

Liabilities 70,000
Estimated Liquidation Expenses 5,000
Cash 75,000

To record payment of liabilities to outside creditors and estimated liquidation

expenses for cash

Loan - Kemba 17,500

Kemba, Capital 17,500

To offset deficit balance of P 17,500 (P 30,000 – 45,000 – 2,500) on his capital to

the loans payable to him.

Loan – Kemba 2,500

Kawhi, Capital (P 50,000 - 27,000 – 1,500) 21,500
Kyrie, Capital (P 30,000 – 18,000 – 1,000) 11,000
Loan – Kyrie 10,000
Cash 25,000

To record the settlement of partner’s loan and capital balances with the remaining
cash in the partnership

Amount received by partners

 Kemba 2,500
Kawhi 21,500
Kyrie (P 11,000 – 10,000) 1,000
Total Cash Distributed 25,000

Problem 2 - LEONARD, CURRY, and JAMES are in the process of liquidating their
partnership. Since it may take several months to convert the other assets into cash, the
partners agree to distribute all available cash immediately, except for P 12,000 that is set
aside for contingent expenses. The balance sheet and residual profit and loss sharing
percentages are as follows:

Cash P 500,000 Accounts Payable P 225,000

Other assets 225,000 LEONARD, Capital (20%) 168,000
CURRY, Capital (30%) 270,000
JAMES, Capital (50%) 62,000
Total assets P 725,000 Total liabilities and equity P 725,000

REQUIRED:

1. Using a safe payments schedule, how much cash should CURRY receive in the first
distribution? Ans. P 165,000

2. Using a safe payment schedule, how much cash should LEONARD receive in the first
distribution? Ans. P 98,000

Prepare a safe payments schedule:

Other Accounts LEONARD, CURRY, JAMES,

Cash Assets = Payable Capital Capital Capital
Balance 500,000 225,000 225,000 168,000 270,000 62,000

Cash set
aside for
liquidation
expenses (12,000) (2,400) (3,600) (6,000)

Payment of
liabilities (225,000) (225,000)

Theoretical
loss of other
assets (225,000) (45,000) (67,500) (112,500)

Balance after
theoretical
loss 120,600 198,900 (56,500)
(22,600) (33,900) 56,500
 Absorption of
deficit
balance by
sufficient
partners

Amount that
can be safely
distributed to
partners 263,000 - - 98,000 165,000 -

Problem 3 – ARYA. BRAN, and CERSEI are partners who share profits and losses in the
ratio of 5:2:3, respectively. On January 1, 2020, they decided to liquidate the partnership
and the statement of financial position was prepared as follows:

ASSETS LIABILITIES AND CAPITAL

Cash 5,000 Liabilities 6,000
Non-Cash Assets 50,000 BRAN, Loan 7,000
CERSEI, Loan 2,500
ARYA, Capital 17,450
BRAN, Capital 12,550
CERSEI, Capital 9,500
Total 55,000 Total 55,000

The following transactions occurred as a result of the liquidation process:

Book Value Liquidation Payment to Cash

Month of Assets Sold Proceeds Expenses Creditors Withheld
January 12,000 10,500 500 6,000 2,000
February 7,000 6,000 750 1,000
March 15,000 10,000 1,000 2,500
April 2,000 5,000 5,000 0

REQUIRED:

1. Using Cash Priority Program (CPP), how much is the amount to be received by ARYA,
BRAN, and CERSEI for the month of January?

2. Using Cash Priority Program (CPP), how much is the amount to be received by ARYA,
BRAN, and CERSEI for the month of February?

3. Using Cash Priority Program (CPP), how much is the amount received by ARYA,
BRAN, and CERSEI for the month of March?

4. Using Cash Priority Program (CPP), how much is the amount to be received by ARYA,
BRAN, and CERSEI for the month of April?
Step 1: Prepare Cash Priority Program

ARYA BRAN CERSEI

Capital Balances 17,450 12,550 9,500
Add: Loan Balances 7,000 2,500
Total Partner Interest 17,450 19,550 12,000
Divided by Profit and Loss Ratio 50% 20% 30%
Loss Absorption Capacity 34,900 97,750 40,000
Difference from highest LAC to next highest (57,750)
34,900 40,000 40,000
Difference from next highest LAC to lowest (5,100) (5,100)
34,900 34,900 34,900

Determination of Cash Priorities

Priority 1 – BRAN to receive cash in the amount of P 11,550 (P 57,750 x 20%)

Priority 2 – BRAN to receive cash of P 1,020 (P 5,100 x 20%) and CERSEI receive cash
of P 1,530 (P 5,100 x 30%)
Priority 3 – Each partner to receive an amount equal to the profit and loss ratio applied
to the cash balance to be distributed.
Step 2: Distribution of Cash for January

Cash available (P 5,000 + 10,500) 15,500

Less: Payment for Liquidation Expenses (500)
Less: Payment to Creditors (6,000)
Less: Cash Withheld (2,000)
Cash available for distribution to partners 7,000

Cash to be distributed to:

ARYA -
BRAN 7,000
CERSEI -
All cash will be distributed to BRAN to satisfy the first priority

Step 3: Distribution of Cash for February

Cash available (P 2,000 + 6,000) 8,000

Less: Payment for Liquidation Expenses (750)
Less: Cash Withheld (1,000)
Cash available for distribution to partners 6,250

Cash to be distributed to:

ARYA -
BRAN *P 5,230
CERSEI *P 1,020
*BRAN
From Priority 1 = P 4,550 (lacking difference)
From Priority 2 = P 680 (P 1,700 x 1,020/2,550)

*CERSEI
From Priority 2 = P 1,020 (P 1,700 x 1,530/2,550)

Step 3: Distribution of Cash for March

Cash available (P 1,000 + 10,000) 11,000

Less: Payment for Liquidation Expenses (1,000)
Less: Cash Withheld (2,500)
Cash available for distribution to partners 7,500

Cash to be distributed to
ARYA P 3,325
BRAN P 1,670
CERSEI P 2,505

*ARYA
From Priority 3 = P 3,325 (P 6,650 x 50%)

*BRAN
From Priority 2 = P 340 (P 1,020 – 680)
From Priority 3 = P 1,330 (P 6,650 x 20%)

*CERSEI
From Priority 2 = P 510 (P 1,530 – 1,020)
From Priority 3 = P 1,995 (P 6,650 x 30%)

Step 4: Distribution of Cash for April

Cash available (P 2,500 + 5,000) 7,500

Less: Payment for Liquidation Expenses (5,000)
Cash available for distribution to partners 2,500

Cash to be distributed to
ARYA P 1,250 (P 2,500 x 50%)
BRAN P 500 (P 2,500 x 20%)
CERSEI P 750 (P 2,500 x 30%)

Self-Help: You can also refer to the sources below to help you
further understand the lesson:
Course Hero – Principles of Accounting: Partnerships and Limited Liability Companies
https://www.coursehero.com/sg/principles-of-accounting/partnerships-and-limited-
liability-companies/

Haman, Edward A.. Complete Partnership Book. Naperville, IL, USA: Sphinx
Publishing, an Imprint of Sourcebooks, Inc., 2004. ProQuest ebrary. Web. 3 June
2016.http://site.ebrary.com/lib/uniofmindanao/detail.action?docID=10096075&p00=of+
organization+for+accounting+type+business+partnership

Youtube – Filipino Accounting Tutorial: Partnership Liquidation – Lump-Sum Method

(Part 1) https://www.youtube.com/watch?v=YGEtzcigXIk&list=PLl-IwImaCVm5nGgG-
k4FmlEwLMzbfQdpF&index=6

Youtube – Filipino Accounting Tutorial: Partnership Liquidation – Lump-Sum Method

(Part 2) https://www.youtube.com/watch?v=zYK40qi10a0&list=PLl-IwImaCVm5nGgG-
k4FmlEwLMzbfQdpF&index=7

Youtube – Filipino Accounting Tutorial: Partnership Liquidation – Installment

Liquidation – Schedule of Safe Payments (Part 1)
https://www.youtube.com/watch?v=Px2eTq_oagk&list=PLl-IwImaCVm5nGgG-
k4FmlEwLMzbfQdpF&index=8

Youtube – Filipino Accounting Tutorial: Partnership Liquidation – Installment

Liquidation – Schedule of Safe Payments (Part 2)
https://www.youtube.com/watch?v=0BRNc1zXKwc&list=PLl-IwImaCVm5nGgG-
k4FmlEwLMzbfQdpF&index=9

Youtube – Filipino Accounting Tutorial: Partnership Liquidation – Cash Priority

Program (Part 1) https://www.youtube.com/watch?v=JIwUje4AOU0&list=PLl-
IwImaCVm5nGgG-k4FmlEwLMzbfQdpF&index=10

Youtube – Filipino Accounting Tutorial: Partnership Liquidation – Cash Priority

Program (Part 2) https://www.youtube.com/watch?v=bjLv2ULXfV8&list=PLl-
IwImaCVm5nGgG-k4FmlEwLMzbfQdpF&index=11

Youtube – Mr. Accounting: Advanced Financial Accounting & Reporting - Partnership

Liquidation (Lump-Sum)
https://www.youtube.com/watch?v=h2JlOKSRuHg&list=PLMouxtHoLUZf-
F5sutOsJao2_5L-e_DnV&index=4

Youtube – Mr. Accounting: Advanced Financial Accounting & Reporting - Partnership

Liquidation (Installment)
https://www.youtube.com/watch?v=EVHuBKJM6Ns&list=PLMouxtHoLUZf-
F5sutOsJao2_5L-e_DnV&index=5
Let’s Check

EX-1. On June 11, 2020, A, B, and C form a partnership investing cash of P 15,000, P
13,500, and P 4,200, respectively. The partners share profits 3:2:2 and on August 30,
2020, they have cash of P 1,000, and other assets of P 47,500; liabilities are P 25,600.
On this date they decide to go out of business and sell all the assets for P 30,000. C has
personal assets of P 1,500 that may, if necessary, be used to meet partnership
obligations. How much should be distributed to B upon liquidation of the partnership?

EX-2. On December 31, 2020, the accounting records of the ABC partnership included
the following information:

A, drawing (debit balance) P 24,000 A, capital P 123,000

B, drawing (debit balance) 9,000 B, capital 100,500
C, loan 30,000 C, capital 108,000

Total assets amounted to P 478,500, including P 52,500 cash, and liabilities totaled P
150,000. The partnership was liquidated on December 31, 2020, and B received P 83,250
cash pursuant to the liquidation. A, B, and C share net income and losses in a 5:3:2 ratio
respectively. How much should A and C receive upon liquidation of the partnership?

EX-3. A balance sheet for the partnership of A,B, and C, who share profits in the ratio of
2:1:1, shows the following balances just before liquidation:

Cash P 12,000 A, capital P 22,000

Other Assets 59,500 B, capital 15,500
Liabilities 20,000 C, capital 14,000

On the first month of the liquidation, certain assets are sold for P 32,000. Liquidation
expenses of P 1,000 are paid, and additional liquidation expenses are anticipated.
Liabilities are paid amounting to P 5,400, and sufficient cash is retained to insure the
payment to creditors before making payments to partners. On the first payment to partner,
A receives P 6,250. How much is the amount of cash withheld for anticipated liquidation
expenses and unpaid liabilities?

EX-4. A, B, and C share profits in 5:3:2 ratio. Their capital prior to liquidation (which is
expected to result in substantial gains) are as follows:

A P 18,000 B P 27,000 C P 3,000

The partners wish to distribute cash as it becomes available so that the capital accounts
may be brought into the profit and loss ratio as rapidly as possible. Who is the partner to
receive the first available cash and up to how much?
EX-5. GEORGIA, VIRGINIA, and ATLANTA are in the process of liquidating the
partnership. ATLANTA has agreed to accept the inventory, which has a fair value of P
60,000, as part of her settlement. A balance sheet and the residual profit loss sharing
percentages are as follows:

Cash P 248,000 Accounts Payable P 180,000

Inventory 100,000 GEORGIA, Capital (40%) 98,000
Plant Assets 280,000 VIRGINA, Capital (40%) 175,000
ATLANTA, Capital (20%) 175,000
Total Assets P 628,000 Total Liabilities and Capital P 628,000

If the partners then distribute the available cash using a safe payments schedule,
ATLANTA will receive

Let’s Analyze

COMPREHENSIVE PROBLEMS:

Problem 1 – On March 30, 2017, GAMBIT, JEAN GRAY, and ROGUE partnership had
the following fiscal year-end balance sheet:

Cash P 6,000 Accounts Payable P 10,500

Accounts Receivable 9,000 Loan from ROGUE 7,500
Inventory 21,000 GAMBIT, capital (40%) 21,000
Plant Assets, net 19,500 JEAN GRAY, capital (20%) 15,000
Loan to GAMBIT 7,500 ROGUE, capital (40%) 9,000
Total P 63,000 Total P 63,000

The percentages shown are the residual profit and loss sharing ratios. The partners
dissolved the partnership on January 1, 2017 and began the liquidation process. The
partners set the policy of setting aside P 3,000 cash for contingent expenses every month
until prior to the last distribution period. The partnership strictly followed the liquidation
process mandated by law.

During January, the following realization of assets and payment of liquidation expenses
occurred:
 Accounts receivable of P 6,000 was collected and the balance is deemed as bad
debt
 All inventory was sold for P 15,000
 Liquidation expense of P 1,500 was paid

During February the following realization of assets and payment of liquidation expenses
occurred:
 The plant assets was sold for P 15,000
  Liquidation expense of P 2,000 was paid

REQUIRED:

1. Using Cash Priority Program, how much cash would JEAN GRAY receive from the
cash that is available for distribution on January 30, 2017?

2. Using Schedule of Safe Payment, how much cash would GAMBIT receive from the
cash that is available for distribution on January 30, 2017?

3. Using Cash Priority Program, how much cash would ROGUE receive from the cash
that is available for distribution on February 28, 2017?

4. Using Schedule of Safe Payment, how much cash would JEAN GRAY receive from
the cash that is available for distribution on February 28, 2017?

Problem 2 – KLAY, KYRIE, and KEVIN are partners who share profits and losses in the
ratio of 40:30:30, respectively. On January 1, 2017, they decided to liquidate the
partnership and the statement of financial position was prepared as follows:

ASSETS LIABILITIES & CAPITAL

Cash 20,000 Liabilities 40,000
Non-Cash Assets 65,000 KYRIE, Loan 5,000
KEVIN, Loan 7,500
KLAY, Capital 10,000
KYRIE, Capital 10,000
KEVIN, Capital 12,500
Total Assets 85,000 Total Liabilities & Capital 85,000

In January, non-cash assets with book value of P 35,000 was sold for P 30,000 to a Mr.
Thompson; liquidation expense of P 5,000 was paid and only 40% of the outstanding
liabilities were paid in January. The partnership withholds cash of P 2,500 for next month’s
liquidation expenses.

In February, non-cash assets with book value of P 15,000 was sold to Mr. James but a
loss on realization of P 3,000 was recognized. Liquidation expense of P 2,750 was paid
and only P 10,000 recorded liabilities were paid during the month. The partnership
withholds cash of P 2,000 for next month’s liquidation expenses and P 2,750 in
anticipation for future unrecorded liability.

In March, the remaining non-cash assets were sold to Ms. Smith for P 12,500. A
liquidation expense of P 5,500 was paid. The remaining recorded liabilities including P
2,000 unrecorded liabilities were paid during the month to end the liquidation process.
REQUIRED:

1. How much is the amount of cash available for distribution in the month of January?
2. How much is the amount of cash available for distribution in the month of March?

3. How much should KYRIE and KEVIN receive in the month of January?

4. How should KLAY and KYRIE receive on February?

5. How much should KLAY, KYRIE, and KEVIN receive in the month of March?

In a Nutshell

 A liquidation of a partnership is the process of paying off liabilities, selling assets, and
distributing remaining cash and assets to partners during a dissolution of the
partnership.

 A liquidation occurs when a partnership business goes out of business.

 Upon closure, the day-to-day operations of the business are discontinued, and the
accounts should be adjusted and then closed.

 A realization is the first step in the liquidation of a partnership when the assets of the
partnership are sold for cash.

 The steps in the liquidation process are:

o Sale of assets (realization)
o Division of gains or losses
o Payment of liabilities
o Distribution to partners

Q&A LIST
Do you have any questions for clarification?
Questions/Issues Answers
1. 1.
2. 2.
3. 3.
4. 4.
5. 5.
KEYWORDS INDEX
This section lists down the keywords that help you for recall the discussions
Partner Capital deficiency Installment Liquidation
Partnership No capital deficiency Loss absorption capacity
Partnership Agreement Liquidation expenses Theoretical loss
Partner’s capital General partner Schedule of cash
statement payments
Partnership Liquidation Limited partner
Income Ratio Lump-sum Liquidation

Big Picture in Focus: ULO2. Apply the standards, principles and

methods in accounting for joint operations and joint venture
transactions (IFRS 11)

Metalanguage
In this section, the most essential terms relevant to the study and demonstrate ULOa will
be operationally defined to establish a common frame of refence as to how the texts work
in your chosen field or career. You will encounter these terms as we go through this unit.
Please refer to these definitions in case you will encounter difficulty in understanding
concepts.

Joint Arrangement

 IFRS 11, paragraph 4, defines a joint arrangement as “an arrangement of which two
or more parties have joint control.”

 Paragraph 5 provides that a joint arrangement has the following characteristics:

o The parties are bound by a contractual arrangement
o The contractual arrangement gives two or more parties joint control of the
arrangement

Joint Control
 Joint control is the contractually agreed sharing of control of an arrangement which
exists only when decisions about the relevant activities require unanimous consent of
the parties sharing control

Types of Joint Arrangement

IFRS 11, paragraph 6, provides that a joint arrangement is either a joint operation or a
joint venture.

Joint Operation is a joint arrangement, whereby the parties have joint control of the
arrangement have right to the assets and obligations for the liabilities relating to the
arrangement. The parties to a joint operation are known as joint operators

Joint Venture is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement. The parties to a joint
venture are known as joint venturers

Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes) for the next two (2) weeks
of the course, you need to fully understand the following essential knowledge that will be
laid down in the succeeding pages. Please note that you are not limited to exclusively
refer to the these resources. Thus, you are expected to utilize other books, research
articles and other resources that are available in the university’s library e.g. ebrary,
search.proquest.com etc.

JOINT ARRANGEMENT – A JOINT OPERATION OR A JOINT VENTURE?

 Appendix B of IFRS 11, paragraph B14, provides that the classification of joint
arrangement depends upon the rights and obligations of the parties to the
arrangement.
o When the entity has rights to the assets and obligations for the liabilities relating
to the arrangement, the joint arrangement is a joint operation
o When the entity has rights to the net assets of the arrangement, the joint
arrangement is a joint venture

 The rights and obligations of the parties to the arrangement can be assessed from the
structure of the joint arrangement

 The joint arrangement may be structured through a separate vehicle or may not be
structured through a separate vehicle

 The “separate vehicle” is the legal entity established for purposes of the joint
arrangement
 This legal entity may be a corporation, partnership or any other legal form created
independent of the parties to the arrangement

Joint Arrangement “Without a Separate Vehicle”

 Appendix B of IFRS 11, paragraph B16 provides explicitly that the joint arrangement
is a joint operation if the arrangement is structured without a separate vehicle

 Under such contractual arrangement, the rights to the assets and obligations for
liabilities relating to the arrangement are clearly established

 The contractual arrangement also establishes the rights of the parties to the
corresponding revenue and obligations of the parties for the corresponding expenses

Joint Arrangement “With a Separate Vehicle”

 Appendix B of IFRS 11, paragraph B19 provides that a joint arrangement in which the
assets and liabilities relating to the arrangement are held by a separate vehicle can
be either a joint operation or joint venture

 Paragraph B21 further provides that when the parties have structured the joint
arrangement through a separate vehicle, the rights and obligations of the parties
depend on the following:
o The legal form of the separate vehicle
o The terms of the contractual arrangement
o Other relevant facts and circumstances

 The legal form of the separate vehicle is relevant when assessing the type of joint
arrangement

 For example, the legal form causes the separate vehicle to be considered in its own
right and independent of the parties

 The assets and liabilities held in the separate vehicle are the assets and liabilities of
the separate vehicle and not the assets and liabilities of the parties

 In such a case, the parties have only rights to the net assets of the separate vehicle

 Accordingly, the legal form of the separate vehicle indicates that the joint arrangement
is a joint venture
 However, the terms of the contractual arrangement agreed upon by the parties and
other relevant facts and circumstances can override the assessment of the rights and
obligations conferred upon the parties by the legal form of the separate vehicle

Examples of a Joint Operation

 An example of a joint operation is when parties to a joint arrangement agree to
manufacture, market and distribute jointly a particular product, such as an aircraft

 Each joint operator uses its own property, plant and equipment and carries its own
inventory. It also incurs its own expenses and liabilities

 Different parts of the manufacturing process are carried out by each joint operator

 Each joint operator bears its own costs and recognizes a share of the revenue from
the sale of the aircraft

 Another example of a joint operation is when parties agree to share and operate an
asset together

 A number of oil producing entities may jointly control and operate an oil pipeline

 In such a case, the contractual arrangement establishes the parties’ rights to the
pipeline that is operated jointly and how revenue from the asset and operating costs
are shared among the parties

 Each joint operator accounts for its share of the joint asset and its agreed share of
liabilities, and recognizes its share of revenue and expenses in accordance with the
contractual arrangement

Examples of a Joint Venture

 The parties agreed to structure a joint arrangement through an incorporated entity

 In other words, the parties established a corporation in which each party has an equity
interest

 The entity operates in the same way as other entities, except that a contractual
arrangement between and among the joint venturers establishes joint control over the
economic activities of the entity

 The entity controls its assets, incurs liabilities and expenses and earns income

 The entity may enter into contracts in its own name and raises finance for purposes
of the arrangement

 In such a case, the legal form of the incorporated entity clearly indicates that the
parties have rights only to the net assets of the entity

 Thus, this joint arrangement is a joint venture

ACCOUNTING FOR JOINT OPERATION

 IFRS 11, paragraph 20, provides that a joint operator shall recognize in relation to its
interest in a joint operation:
o Its assets, including its share of any assets held jointly
o Its liabilities, including its share of any liabilities incurred jointly
o Its revenue from the sale of its share of the output arising from the joint
operation
o Its share of the revenue from the sale of the output by the joint operation
o Its expenses including its share of any expenses incurred jointly

 Paragraph 21 further provides that a joint operator shall account for the assets,
liabilities, revenue and expenses relating to its interest in a joint operation in
accordance with IFRS applicable to the particular assets, liabilities, revenue, and
expenses

SAMPLE PROBLEMS

Problem 1 – On January 1, 2020, KK Company and DD Company signed an agreement

to form a joint operation to manufacture a product called plasma. This product is used in
the manufacturing of television. To commence the operation, both operators contributed
P 180,000 in cash.

REQUIRED:

1. Prepare journal entries to record the following:

a. Contributions of cash by the operators

b. Use of cash and loan to buy machinery and equipment costing P 96,000 (cash paid,
P 60,000 and the balance on a loan account) and raw materials purchase on account
costing P 78,000
c. Labor incurrence amounting to P 86,400 with P 84,000 paid in cash
d. Loans from the bank, P 72,000
e. Repayment of loan – machinery and equipment, P 12,000, raw materials amounting
to P 50,400 and other factory expenses, of P 156,000
f. Depreciation of machinery and equipment P 9,600
g. Transfer of materials, labor and overhead to Work-in-Process: payroll, P 86,400;
Materials, P 57,600; Factory overhead – net, light and power, P 156,000 and
depreciation of P 9,600
h. Transfer of Work-in-Process to Finished Goods Inventory, P 216,000
i. Transfer of Finished Goods Inventory, P 192,000 to Joint Operators throughout the
year

JOURNAL ENTRIES FOR ABOVE TRANSACTIONS

a. Cash 360,000
KK, Capital 180,000
DD, Capital 180,000
To record contributions of cash by the operators to the joint operation

b. Machinery and Equipment 96,000

Cash 60,000
Loans Payable 36,000
To record acquisition of machinery and equipment for part cash and loans

Raw Materials 78,000

Accounts Payable 78,000
To record purchase of raw materials on account

c. Salaries and Wages Expense 86,400

Cash 84,000
Wages Payable 2,400
To record incurrence of labor, and accrual of unpaid salaries

d. Cash 72,000
Loans Payable 72,000
To record proceeds from bank loan

e. Loans Payable 36,000

Accounts Payable 50,400
Factory Overhead Control 156,000
Cash 242,400
To record payment for loan on machinery and equipment, accounts payable
for raw materials, and other factory expenses

f. Depreciation Expense 9,600

Accumulated Depreciation – M&E 9,600
To record accrual of depreciation expense for the machinery and equipment

g. Work-in-Process Inventory 309,600

Raw Materials 57,600
Salaries and Wages Expense 86,400
Factory Overhead Control 156,000
Depreciation Expense 9,600
To charge costs into the work-in-process inventory

h. Finished Goods Inventory 216,000

Work-in-Process Inventory 216,000
To record cost of goods manufactured for the year
 i. KK, Capital 96,000
DD, Capital 96,000
Finished Goods Inventory 192,000
To record transfer of finished goods to the joint operators throughout the
year

2. Determine the ending balances of:

a. Cash

Contribution by joint operators P 360,000

Cash paid on acquisition of machinery & equipment (60,000)
Cash paid for salaries and wages (84,000)
Cash proceeds from bank loan 72,000
Payment for loan on machinery & equipment (36,000)
Payment for accounts payable on raw materials (50,400)
Payment for other factory expenses (156,000)
Cash Balance, End P 45,600

b. Work-in-process account

Charged to work-in-process inventory P 309,600

Cost of goods manufactured (216,000)
Work-in-Process Inventory P 93,600

c. KK and DD Capital Balances:

Beginning Balances P 180,000

Transfer of finished goods (96,000)
Ending Capital Balances P 84,000

Problem 2 – Because the scale of the project exceeded the capacity of entities X and Y
individually, they tendered jointly for a public contract with a government to construct a
motorway between two cities. Following the tender process, the government awarded the
contract jointly to entities X and Y.

In accordance with the contractual arrangements entities X and Y are jointly contracted
with the government for delivery of the motorway in return for P 16,800,000. (A fixed
contract). In 20x4, in accordance with the agreement between entities X and Y:
a. Entities X and Y each used their own equipment and employees in the construction
activity
b. Entity X constructed three bridges needed to cross rivers on the route at a cost of P
4,800,000
c. Entity Y constructed all of the other elements of the motorway at a cost of P 7,200,000.
d. Entities X and Y shared equally in the P 16,800,000 jointly invoiced to (and received
from) the government

REQUIRED: Prepare entries in the books of joint operator Entity X and Entity Y to reflect
the above transaction.

Entities X and Y each used their own equipment and employees in the construction
activity

No journal entry needed in the books of Entity X and Entity Y

Entity X constructed three bridges needed to cross rivers on the route at a cost of P
4,800,000

Construction in Progress 4,800,000

Cash 4,800,000

Entity Y constructed all of the other elements of the motorway at a cost of P 7,200,000.

Construction in Progress 7,200,000

Cash 7,200,000

Entities X and Y shared equally in the P 16,800,000 jointly invoiced to (and received from)
the government

Entity X

Cash (P 16,800,000 x ½) 8,400,000

Construction Revenue 8,400,000

Cost of Construction 4,800,000

Construction in Progress 4,800,000

Entity Y

Cash (P 16,800,000 x ½) 8,400,000

Construction Revenue 8,400,000

Cost of Construction 7,200,000

Construction in Progress 7,200,000

Problem 3 – LJ , AD, and KL formed a joint operation. They agreed to make initial
contributions of P 50,000 each. Profit or loss shall be divided equally. The following data
relate to the joint operation’s transactions:
 Joint Operation Expenses paid from JO Cash Merchandise Inventory Taken
LJ 40,000 credit 25,000 25,000
AD 50,000 credit 10,000 30,000
KL 60,000 credit 15,000 20,000

REQUIRED:

1. How much is the balance of joint operations account before distribution of profit or
loss?
2. How much is the joint operation’s sales during the period?
3. How much is the joint operation’s profit or loss during the period?

Step 1: Plot the items above to a Joint Operation T-Account to reflect the flow of
transactions.

Step 2: The sum of the initial contributions is equivalent to the merchandise contributions

Step 3: The sum of the credit balance of the joint operation in each operator’s accounts
reflect the total sales or revenue of the joint operation
Step 4: The sum of the expenses paid from JO Cash represents the total expenses of the
operation.

Step 5: The sum of the merchandise taken by the operators represent the total amount
of unsold inventory

Joint Operation
Merchandise Contribution 150,000 350,000 Sales and other items of income
Expenses 50,000 _______
Balance before distribution 150,000
75,000 Unsold merchandise
225,000 Net Profit

4. How much is the cash settlement – receipt (payment) by LJ?

Initial contribution 50,000

Share in Net Income (P 225,000 x 1/3) 75,000
Merchandise Taken (25,000)
Cash Settlement 100,000

5. How much is the cash settlement – receipt (payment) by AD?

Initial contribution 50,000

Share in Net Income (P 225,000 x 1/3) 75,000
Merchandise Taken (30,000)
Cash Settlement 95,000
ACCOUNTING FOR A JOINT VENTURE

 PAS 28, paragraph 2, explicitly mandates that investment in joint venture shall be
accounted for using the equity method of accounting.

 This is the same equity method used in accounting for an investment in associate

 However, Paragraph 18 provides that when an investment in joint venture is held by

or is held indirectly through an entity that is a venture capital organization, mutual trust
fund, unit trust and similar entities including insurance-linked fund, the entity may elect
to measure the investment in joint venture at fair value through profit or loss.
SAMPLE PROBLEM:

Two real estate companies set up a separate vehicle for the purpose of acquiring and
operating condominium units. One of the companies, TOWER Company paid P
2,016,000 for a 30% interest in DAM Corporation’s (a separate vehicle) outstanding voting
stock on January 1, 2020. Such acquisition gave TOWER Corporation to joint control with
another company over DAM Corporation. The book values and fair values of DAM’s
assets and liabilities on January 1, along with amortization data, are as follows:

DAM Co. Book Value DAM Co. Fair Value

Cash P 480,000 P 480,000
Accounts receivable – net 840,000 840,000
Inventories (sold in 2020) 1,200,000 1,440,000
Other current assets 240,000 240,000
Land 1,080,000 2,040,000
Buildings – net (10 year remaining life) 1,800,000 2,400,000
Equipment – net (7 year remaining life) 1,440,000 600,000
Total Assets P 7,080,000 P 8,040,000

Accounts payable P 960,000 P 960,000

Other current liabilities 240,000 240,000
Bonds payable (due January 1, 2025) 1,200,000 1,320,000
Common stock, P 10 par 3,600,000
Retained earnings 1,080,000
Total Liabilities and Stockholders’ Equity P 7,080,000

DAM Corporation reported net income of P 1,440,000 for 2020 and paid dividends of P
720,000

REQUIRED:

a. Determine the investment in DAM on December 31, 2020

b. Determine the income from investment for the year 2020

Step 1: Record the investment made by TOWER Company in DAM Company on January
1, 2020

Investment in DAM Company 2,016,000

Cash 2,016,000

Step 2: Analyze the excess of the fair value over the book value of items in DAM Co. at
the date of acquisition of joint control.

Excess Amortization for 2020

Inventories 240,000 240,000
Land 960,000 -
Buildings 600,000 60,000
Equipment (840,000) (120,000)
Bonds Payable (120,000) (24,000)
156,000

Step 3: Determine the share of TOWER Company in DAM Company’s net income for
2020

Share of TT Company (P 1,440,000 x 30%) P 432,000

Step 4: Consider the effect of the amortization of excess in your share of net income from
DAM Company

Effect of amortization of excess (P 156,000 x 30%) P 46,800

Step 5: Record the share of TOWER Company in DAM Company’s net income for 2020

Investment in DAM Company 432,000

Income from Investment 432,000

Income from Investment 46,800

Investment in DAM Company 46,800

Step 6: Record the cash dividend received by TOWER Company from DAM Company

Cash (P 720,000 x 30%) 216,000

Investment in DAM Company 216,000

Investment in DAM Company, January 1, 2020 2,016,000

Add: Net Income From Investment (P 432,000 – 46,800) 385,200
Less: Dividends received (216,000)
Investment in DAM Company, December 31, 2020 2,185,200

Self-Help: You can also refer to the sources below to help you
further understand the lesson:
Wang, Yue. Contractual Joint Ventures in China. New York, US: Nova, 2008.
ProQuest ebrary. Web. 3 June 2016.
http://site.ebrary.com/lib/uniofmindanao/detail.action?docID=10660217&p00=joint+arr
angements

Joint Ventures, Mergers and Acquisitions, and Capital Flow. New York, US: Nova,
2009. ProQuest ebrary. Web. 3 June 2016.
http://site.ebrary.com/lib/uniofmindanao/detail.action?docID=10671085&p00=joint+ve
ntures

Youtube – Silvia M. (of IFRSbox) – IFRS 11 Joint Arrangements – Summary

https://www.youtube.com/watch?v=jLJDjDHdUMI

Youtube – Silvia M. (of IFRSbox) – IAS 28 Investment in Assoicates and Joint

Ventures https://www.youtube.com/watch?v=Krc3jlO-kZI

Let’s Check

EX-1. This is defined as an arrangement of which two or more parties have joint control
a. Joint operation c. Joint venture
b. Joint arrangement d. Joint undertaking

EX-2. Which of the following is a characteristic of a joint arrangement?

I The parties are bound by a contractual arrangement
II The contractual arrangement gives two or more parties joint control over the
arrangement
a. I only b. II only c. Both I and II d. Neither I nor II

EX-3. Joint control is defined as

a. The power to govern the financial and operating policies of another entity so as
to obtain benefits from its activities
b. The power to participate in the financial and operating policy decisions of
another entity
c. The contractually agreed sharing of control of an arrangement which exists only
when decisions about relevant activities require majority consent of the parties
sharing control
 d. The contractually agreed sharing of control of an arrangement which exists only
when decisions about relevant activities require unanimous consent of the
parties sharing control

EX-4. It is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the assets and obligations for the liabilities relating to the
arrangement
a. Joint operation c. Joint venture
b. Joint asset d. Joint entity

EX-5. It is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement
a. Joint operation c. Joint venture
b. Joint undertaking d. Joint entity

EX-6. The parties to a joint venture are called

a. Joint operators c. Joint venturers
b. Investors d. Incorporators

EX-7. The parties to a joint operation are called

a. Joint operators c. Joint venturers
b. Investors d. Owners

EX-8. Which is not a characteristic of a joint operation?

a. Each joint operator uses its own property, plant and equipment and carries its
own inventory
b. Each joint operator incurs its own expenses and liabilities and raises its own
finance which represents its own obligations
c. Each joint operator shall recognize in its financial statements the assets it
controls and the liabilities it incurs
d. Each joint operator shall not recognize in its financial statements the expenses
it incurs and its share of income from the joint operation

EX-9. What is the method of accounting for investment in joint venture?

a. Cost method c. Equity method
b. Consolidation method d. Fair value method

EX-10. When an investment in joint venture is held by a venture capital organization,

mutual trust fund, unit trust and insurance-linked fund
a. The entity must apply the equity method of accounting
b. The entity must apply the fair value method of accounting
c. The entity may elect to measure the investment in joint venture at fair value
through profit or loss
d. The entity may elect to measure the investment in joint venture at fair value
through other comprehensive income
EX-11. A joint arrangement that is structured without a separate vehicle is
a. Joint operation c. Joint venture
b. Joint asset d. Joint entity

EX-12. When two or more parties combine their operations, resources and expertise to
manufacture, market and distribute jointly a particular product, such as an aircraft is an
example of
a. Joint venture c. Joint operation
b. Joint asset d. Joint entity

EX-13. When two or more oil entities control and operate an oil pipeline and each party
uses the pipeline to transport its own product in return for which it bears an agreed
proportion of the expenses of operating the pipeline is an example of
a. Joint operation c. Joint entity
b. Joint asset d. Partnership

EX-14. A joint arrangement that is structured through a separate vehicle should be

accounted for as
a. Joint operation
b. Joint venture
c. Either joint operation or joint venture depending on the legal form of the
separate vehicle
d. Neither joint operation nor joint venture

EX-15. It is the joint arrangement that involves the establishment of a corporation in which
each party has an equity interest in the net assets of the corporation
a. Joint venture
b. Joint operation
c. Either joint venture or joint operation
d. Neither joint venture nor joint operation

EX-16. (ADAPTED) Fox Corporation purchased 25 percent of Down Company’s stock in

January 1, 2020 for P 600,000. At the acquisition date, Down has equipment with a market
value of P 250,000 greater than book value. On that date, Fox Corporation gives the
ability to have joint control with another entity over Down Company. The equipment has
an estimated remaining life of 10 years. In 2020, Down has net income of P 320,000 and
pays P 80,000 of dividends. What is the balance in the investment account on Fox’s
financial records at the end of 2020?

EX-17. (ADAPTED) Ranto and Santo formed a joint operation to acquire and sell a special
type of merchandise Ranto is to manage the operation and to furnish the capital. The
participants are to share equally any gain or loss on the joint operation. On April 1, 2020,
Santo sent Ranto P 10,000 cash, which was all used to purchase merchandise. Ranto
paid freight of P 260 on the merchandise purchased. On April 27, one half of the
merchandise was sold for P 7,200 cash. Ranto paid the cost of delivering merchandise
to customers which amounted to P 240. No further transactions occurred until the end of
the month. The profit (loss) of the operation for the month of April, 2011 is:

EX-18. (ADAPTED) MM and RR agreed on a joint operation to purchase and sell car
accessories. They agreed to contribute P 25,000 each to be used in purchasing the
merchandise, share equally in any gain or loss, and record their operation transactions in
their individual books. After one year, they decided to terminate the operation, and data
from their records were: Joint operation account credit balances: in books of MM, P
18,000; in books of RR, P 20,200, cost of car accessories taken: by MM, P 1,850; by RR,
P 2,600, expenses paid: by MM, P 1,800; by RR, P 1,000. How much was the joint
operation’s sales?

EX-19. (ADAPTED) Reyes, Silva and Tan formed a joint operation. Reyes was
designated as the manager and was to record the joint operation’s transactions in his own
books. As manager, Reyes was to be allowed a salary of P 10,500; the remaining profit
or loss was to be divided equally. The following balances appeared at the end of 2020,
before adjustment for operation inventory and profit:
Debit Credit
Joint operation cash P 48,000 P -
Joint operation - 15,000
Silva, capital 1,000 -
Tan, capital - 27,000

The operation was terminated on December 31, 2020 and unsold merchandise costing P
12,000 were taken over by Tan. Reyes made cash settlement with Silva and Tan. In the
final cash settlement, how much did Tan receive?

EX-21. (ADAPTED) V, I and P form a joint operation for the sale merchandise. P is to
contribute the merchandise, while V is to act as the manager and I to be allowed a bonus
of 25% of the profit after deduction of the bonus as expense. I and P are to be allowed
6% interest a year on their original investments. The balance of the profit on the operation
is to be divided equally among the three participants. On July 1, 2020, I and P contributed
merchandise of P 66,000 and P 90,000, respectively. For the period between July 1 and
October 1, V sold operation merchandise on account for P 240,000, of which he collected
P 229,500, allowed sales discounts of P 4,050, and wrote off P 6,450 as uncollectible. V
paid joint operation expenses of P 58,560 from the operation cash. On October 1, the
joint operation was terminated and unsold merchandise was returned at the following
values: to I, P 15,000, and to P, P 11,400. Cash settlement was completed by V on the
same day. The cash settlement received by I and P, respectively are

EX-22. (ADAPTED) OO, PP, and QQ formed a joint operation to bankroll a series of
cultural shows for the Philippine Centennial celebration. OO and PP agreed to contribute
cash and QQ was to manage the affairs of the joint operation. QQ was to receive a bonus
of 25% of the net income before bonus, OO and PP were to be allowed interest on their
capital contributions at 6% per annum, and any remainder was to be divided equally
among the three partners. After a year, the joint operation was terminated and the
following information was provided: original capital contributions used to purchase tickets,
were P 1,815,000 and P 2,475,000, respectively, from OO and PP; QQ sold tickets worth
a total of P 6,600,000; and QQ paid expenses of P 1,899,150 out of joint operation funds.
How much was the joint operation’s net income after the bonus to QQ?

EX-23. (ADAPTED) On September 30, 2019 R, S, and T agreed on a joint operation to

sell their common stock shares of the Golden Copper Mines. Gains and losses are to be
shared in proportion to the contributed shares. R contributes 6,000 shares, which had
cost him P 42 a share; S gave 10,000 shares, which had cost P 58 each and T 4,000
shares which had cost P 62 per share. The par value of the shares was P 40 and when
the operation began market value was P 50 a share. On October 20 he sold 4,500 shares
for P 44 a share and P 3,000 expenses incurred. On November 1, Golden Copper
distributed a stock dividend of 20%. T sold 5,000 shares, ex-stock dividend, on November
5 for P 25 a share. On November 15, Golden Copper paid a cash dividend of P 1 per
share. On November 22, he sold 6,000 shares for P 28. On December 20, the remainder
of the shares were sold for P 35 a share. T’s expenses were P 4,700. The 20,000 shares
contributed to the operation should be valued at:

Let’s Analyze

COMPREHENSIVE PROBLEMS:

Problem 1 – X, Y, an Z agreed to form a joint operation. Profit or loss of the joint operation
shall be divided equally. Y is appointed as the manager. The following were the
transactions during the year:
 Inventory costing P 1,000 was sent by X to Y
 Freight paid by on the inventories sent to Y amounted to P 50
 Cash of P 2,000 was sent by Z to Y to be used to purchase additional inventory
 Y purchased additional inventory amounting to P 2,500, P 500 of which were made
on account of Y
 Cash sales made by Y amounted to P 8,000
 Operating expenses amounting to P 550 were paid by Y using own cash
 Unsold inventory at year-end amounted to P 300
REQUIRED:

1. If there is no separate books maintained for Joint Operations, how much is the profit
or loss of the Joint Operations?

2. How much is the share of profit of X, Y, and Z respectively?

3. Assume that the Joint Operation is liquidated and Z is charged the unsold inventory
at cost, how much is the Joint Operation Cash to be shown in the books of Y?

4. How much is the cash receipt or (cash payment) of X, Y, and Z, respectively?

5. If there is a separate book maintained for Joint Operations, how much is the profit or
loss of the Joint Operations?

6. How much is the share of profit of X, Y, and Z, respectively?

7. How much is the investment in Joint Operations of X, Y, and Z, shown in their

respective books?

8. How much is the capital balance of X, Y, and Z, respectively shown in the Joint
Operations Book?

Problem 2 – GSW owns 20% in JV Inc. and uses the equity method to account for its
interest in the joint venture. GSW has joint control over the JV Inc. In 2019, GSW sold
inventory to JV Inc. for P 100,000 with a 50% gross profit on the transaction. The inventory
remains unsold during 2019 and was only sold by JV Inc. to external parties only in 2020.
GSW’s income tax rate is 30%. Assuming JV Inc. reports profit of P 1,000,000 and P
1,500,000 on December 31, 2019 and 2020, respectively:

REQUIRED:

1. What is the share in profit of JV Inc. before adjustment for 2019 and 2020?
2. How much is the unrealized profit from the downstream sale net of tax for 2019 and
2020?
3. How much is the realized profit from downstream sale net of tax for 2019 and 2020?
4. How much is the adjusted share in profit of the JV Inc. for 2019 and 2020?

Problem 3 – NOLA owns 20% in a joint venture and uses the equity method to account
for its interest in the joint venture. NOLA has joint control over the joint venture. In 2019,
the joint venture sold inventory to NOLA for P 100,000 with a 50% gross profit on the
transaction. The inventory remains unsold during 2019 and was only sold by NOLA to
external parties only in 2020. NOLA’s income tax rate is 30%. Assuming Joint Venture
reports profit of P 1,200,000 and P 1,800,000 on December 31, 2019 and 2020,
respectively:

REQUIRED:

1. What is the share in the profit of joint venture before adjustment for 2019 and 2020?
2. How much is the unrealized profit from upstream sale net of tax for 2019 and 2020?
3. How much is the adjusted share in profit of the joint venture in 2019 and 2020?

In a Nutshell

 IFRS 11, paragraph 4, defines a joint arrangement as “an arrangement of which two
or more parties have joint control.”
 Joint control is the contractually agreed sharing of control of an arrangement that could
either be a Joint Operation or a Joint Venture
 Joint Operations are accounted similarly like a partnership
 Joint Ventures are accounted using the equity method of accounting

Q&A LIST
Do you have any questions for clarification?
Questions/Issues Answers
1. 1.
2. 2.
3. 3.
4. 4.
5. 5.

KEYWORDS INDEX
This section lists down the keywords that help you for recall the discussions
Joint Arrangement Joint Control Joint Operation
Joint Venture Operators Venturers
Separate Vehicle Equity Method With or without separate
books
Course Schedule

This section calendars all the activities and exercises, including readings and lectures, as
well as time for making assignments and doing other requirements.
ACTIVITY DATE WHERE TO SUBMIT
Week 4 – 5 ULO1 BlackBoard LMS
Let’s Check - Exercises
Week 4 – 5 ULO1 BlackBoard LMS
Let’s Analyze - Activities
Week 4 – 5 ULO 1 QA Open Submission BlackBoard LMS Forums
List
Week 4 – 5 ULO 2 BlackBoard LMS
Let’s Check - Exercises
Week 4 – 5 ULO 2 BlackBoard LMS
Let’s Analyze
Week 4 – 5 ULO 2 QA Open Submission BlackBoard LMS Forums
List
SECOND EXAM BlackBoard LMS