UNIT-ONE

Accounting for Joint Ventures

1.1 Definition of Joint Ventures

A joint venture is an association of two or more than two persons/companies who have
combined for the execution of a specific transaction and divide the profit or loss in the agreed
ratio. Example: A and B have undertaken the job of construction of a school building. Such an
association for some specific purpose will be termed as a joint venture and each one of them will
be termed as a co-venturer/ venture capitalist. The venture will be over as soon as the transaction
is over i.e. the school building is completed. Joint venture agreements can be made for other
similar transactions, e.g,
 Joint consignment of goods
 Underwriting of shares or debentures issued by a company
 Purchasing and selling of a specific property
 Production of a motion picture
 Construction of huge projects

1.2 Joint Ventures versus Partnership

Similarities:
 Both have some business activity whose profit (or loss) is agreed to be shared by two or
more persons
 Both are associations of two or more persons
Differences:
 A partnership covers or is meant to cover a long period whereas a joint venture is
established only for a specific purpose sought to be achieved in stated period.
 Joint ventures are highly risky businesses while partnerships have less risk. This
arises from the nature of operation.
  Huge capital investment is required for joint ventures; whereas small capital
investment is most often sufficient for partnerships

On account of this lesson, joint venture is also sometimes termed as a ‘temporary partnership’.
Historically, joint ventures used to finance the sale or exchange of a cargo of merchandise in a
foreign country. In an area when marine transportation and foreign trade involved many hazards,
individuals (venturers) would bend together to undertake a venture of this type. The capital
required usually was larger than a 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 the venturers, and their association was ended.

In its traditional form, the accounting for a joint venture did not follow the accrual basis of
accounting. The assumption of continuity was not appropriate; instead of the determination of
net income at regular intervals, the measurement and reporting of net income or loss is usually
postponed to the completion of the venture.

Present-Day Joint Ventures

In today’s business community, joint ventures are less common but still are employed for many
projects such as: d
1. The acquisition, development, and sale of real property;
2. Exploration for oil and gas
3. Construction of bridges, buildings and dams
Currently, joint ventures apply accrual basis of accounting and prepare & report periodic
financial statements for the venture and venturer
1.3 Types of Joint Ventures
1. Small Joint Ventures
 Joint venture don’t maintains books of accounts
 Each venturer record their own incomes and expenses in own accounts (venturer’s
account)
 Memorandum account is used to calculate profit or loss
Example 1.22: Regassa and Daniel buy a used truck and sell it. Regassa pays Br 70,000 for truck
and Br 1,100 for license. Daniel knows the buyer and sells the truck at Br 80,000 after incurring
Br 2,000 on respraying (repainting). Regassa and Daniel agree to share profit and losses equally.

REGASSA Book: JV with DANIEL DANIEL Book: JV with REGASSA

Purchase of Truck 70,000 74,550 Cash from D. Repainting 2,000 80,000 Sale of Truck
License 1,100 Share of Profit 3,450
Share of Profit 3,450 Cash to Regassa 74,550
74,550 74,550 80,000 80,000

Determination of Profit or Loss on Joint Venture’s Operation

No Body’s Book: Memorandum A/c
Purchase of Truck 70,000 80,000 Sale of Truck
License 1,100
Repainting 2,000
Share of Profit 6,900

80,000 80,000

2. Large Joint Ventures

Large joint ventures may be corporate or unincorporated. The term corporate joint venture also is
used by many large American corporation to describe oversees operations by a corporation
whose ownership is divide between an American company and a foreign company. A corporate
joint venture and the accounting for such a venture are described in APB opinion No. 18 “the
equity method of accounting for investment in common stock.”
Corporate Joint venture is established as a limited company. It produces its own full set of
accounts. Corporate joint venture “refers to a corporation owned and operated by small group of
business (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. The
purpose of a corporate joint venture frequently is to share risks and rewards in developing a new
market, product or technology; to combine complementary knowledge; or to pool resources in
developing production or other facilities. A corporate joint venture also usually provides an
arrangement under which each joint venturer may participate, directly or indirectly in the overall
management of the joint venture. Joint ventures thus have an interest or relationship other than as
passive investors. An entity which is a subsidiary of one of the “joint ventures” is not a corporate
joint venture. The ownership of a corporate joint venture seldom changes, and its stock is usually
is not traded publicly. A minority public ownership, however, does not preclude a corporation
from being corporate joint venture.

The APB concludes that the equity method best enables investors in corporate joint ventures to
reflect the underlying nature of their investment in those ventures. Therefore, investors should
account for investments in common stock of corporate joint ventures by the equity method. The
equity method uses the following accounting procedures:
 The cost of acquisition (original investment in common stock) is recorded by
increasing investment account.
 The investor’s investment account is increased as the joint venture earns and
reports income
 Thmhujvyunfje investor’s investment account is decreased whenever dividend is
collected
A recent version of the corporate joint venture is the limited liability company (LLC) joint
venture, which is the version of limited liability partnership. The venturers are responsible for
their own activities.

1.4 Accounting for Joint Ventures

1) Accounting for a Corporate Joint Venture (LLC)
The complexity of modern business, the emphasis on good organization and strong internal
control, the importance of income taxes, the extent of government regulation, and the need for
preparation and retention of adequate accounting records are strong equipments for establishing
separate set of accounting records for every corporate joint venture of large size and long
duration.

In the stockholders equity accounts of the joint venture, each venturer’s account is credited for
the amount of cash or non-cash assets invested. The fiscal year of the joint venture may or may
not coincide with the fiscal years of the venturers, but the use of the accrual basis of accounting
and periodic financial statements for the venture permit regular reporting of the share of net
income or loss allocable to each venturer.

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 GAAP, from the recording of transactions to the preparation of financial
statements.

2) Accounting for an Unincorporated Joint Venture

In unincorporated joint venture, the venture owns an undivided interest in each asset and is
proportionately liable for its share of each liability. Thus, the provision of APB opinion No. 18
(relating to equity method of accounting) may not apply. For example, in some oil and gas
venture accounting, the venture may account in its financial statements for its pro rate of the
assets, liabilities, revenues, and expenses of the venture. Thus, in unincorporated joint venture,
the investors can have the option of using either the equity method of accounting or a
proportionate share method of accounting for the investments.

Example 1.23: Arthur Company and Beatrice Company each invested Br 600,000 and 400,000
interests, respectively for 60% and 40% interest in an unincorporated joint venture named ARBE
on January 2, 2006. The condensed financial statements other than cash flows for ARBE joint
venture for 2006 were as follows.
Income Statement
ABRE Company (A Joint Venture)
Income Statement
For the Year ended December 31, 2006
Revenue..................................................................................Br 2,000,000
Less: Costs and expenses....................................................... 1,500,000
Net Income............................................................................. 500,000
Division of Income:
Arthur Company (60%)......................................................... Br 300,000
Beatrice (40%)....................................................................... 200,000
Total Net Income................................................................... 500,000

Statement of Venturer’s’ Capital

ABRE Company (A Joint Venture)
Statement of Venturers’ Capital
For the Year ended December 31, 2006
Arthur Beatrice
Combined
Company Company
Investment, January 2, 2006..................................................
Br 600,000 Br 400,000 Br 1,000,000
Add: Net Income...................................... 300,000 200,000 500,000
Venturer’s Capital, December 2, 2006..... Br 900,000 Br 600,000 Br 1,500,000

Balance Sheet
ABRE Company (A Joint Venture)
Balance Sheet
December 31, 2006
Assets: Liabilities and Venturers’ Capital:
Current Assets...................................Br 1,600,000 Current Liabilities...............................Br 800,000
Other Assets...................................... 2,600,000 Long-term Debt.............................. 1,900,000
Venturers’ Capital:
Arthur Company............900,000
Beatrice Company.........600,000 1,500,000
...............
Total Assets.......................................Br 4,200,000 Total Liabilities and Capital................ Br
 4,200,000

Venturers’ Journal Entries under Equity Method

Arthur Company Beatrice Company
January 2, 2006: Recording the Investment January 2, 2006: Recording the Investment
Investment In ARBE Company....... 600,000 Investment In ARBE Company....... 400,000

Cash.................................... 600,000 Cash.................................... 400,000

December 31, 2006: recording share of income December 31, 2006: recording share of income
Investment In ARBE Company....... 300,000 Investment In ARBE Company....... 200,000

Investment Income.............. 300,000 Investment Income.............. 200,000

Proportionate Share Method of Accounting

In addition to the two foregoing journal entries, both Arthur Company and Beatrice Company
prepare the following journal entries for the respective shares of the assets, liabilities, revenue,
and expenses of ARBE Company.
Arthur Company Beatrice Company
January 2, 2006: Recording the Investment January 2, 2006: Recording the Investment
Investment In ARBE Company....... 600,000 Investment In ARBE Company....... 400,000

Cash.................................... 600,000 Cash.................................... 400,000

December 31, 2006: recording share of income December 31, 2006: recording share of income
Investment In ARBE Company....... 300,000 Investment In ARBE Company....... 200,000

Investment Income.............. 300,000 Investment Income.............. 200,000

Proportionate Share of Assets, Liabilities, Revenues, and Cost & Expenses

Arthur Company Beatrice Company
December 31, 2006: Proportionate Share December 31, 2006: Proportionate Share
Current Assets (60%)................. 960,000 Current Assets (40%)................. 640,000
Other Assets (60%).................... 1,560,000 Other Assets (40%).................... 1,040,000
Cost and Expense (60%)............ 900,000 Cost and Expense (40%)............ 600,000
Investment Income..................... 300,000 Investment Income..................... 200,000
Current liabilities (60%)....... 480,000 Current liabilities (40%)....... 320,000
Long-term Debt (60%).......... 1,140,00 Long-term Debt (40%)......... 760,000
0
Revenue (60%)..................... 1,200,00 Revenue (40%)..................... 800,000
0
Investment in ARBE Co....... 900,000 Investment in ARBE Co....... 600,000