1

Accounting

Student’s Name

Institutional Affiliation

Course Number and Name

Professor’s Name

Due Date
 2

Memo

To: The Financial Vice-President,

Rose Corporation.

From: Financial Controller

Subject: Pro-Rata Consolidation of Joint Venture

In response to the initial request to provide more information regarding the desirability of

employing either the equity method or the pro-rata consolidation method in financial accounting

and reporting for Rose Corporation in the joint venture with Krome Company, this paper

provides a detailed analysis. First, the equity method is mostly used in companies when reporting

their investments and specific corporate ventures as per ASC 323 (Betancourt & Baril, 2013). In

a broad spectrum, ASC 323 stipulates that a venture is an organization/entity owned and run as a

separate or specific project or business by a limited set of entities for the mutual advantage of the

group members (Betancourt & Baril, 2013).

The group may also include a government. A corporate joint venture is typically formed

to share risks and profits in establishing a new market, product, or technology, pool resources in

developing manufacturing or other facilities, or integrate complementary technological

knowledge (Betancourt & Baril, 2013). A commercial joint venture normally includes an

agreement that allows each joint venturer to participate in the joint venture's overall

management, either directly or indirectly. As a result, joint venturers have a stake or a

 3

relationship beyond passive investors. A corporate partnership does not include a component

from one of the associated venturers (Betancourt & Baril, 2013). Also, a corporate joint venture's

ownership rarely changes, and its shares are rarely traded publicly. Therefore, a corporation's

non-controlling interest in public ownership, on the other hand, does not exclude it from being a

business joint venture.

Bearing that the accounting standards and policies only outline or highlight guidance for

joint ventures with active or valid common stock issued, these standards do not incorporate

policies and provisions for treating ownership of non-corporate ventures (Gonzales, 2013). The

ASC 323 highlights that the equity method would be appropriate for these non-incorporated

firms as well. Suppose the joint venture with Krome Company is non-incorporated, Rose

corporations would own an undivided interest in each asset under the joint venture and would

bear the liability of such assets either in full amount or in partial fulfilment of the total amount

(Gonzales, 2013). In this regard, pro-rata consolidation would provide a comprehensive and

more elaborate picture of Rose's assets and liabilities as per the business concerns. Suppose the

joint venture is incorporated, then Rose does not claim a higher percentage of the assets in the

joint business and corresponding liabilities as the liabilities would be encompassed under the

joint venture’s corporate model (Sekerez, 2020). Therefore, the equity method would still be

appropriate in this joint venture according to the provisions stipulated under ASC 323.

Since purchases are made in the proportion of 70% and 30% for Rose and Krome

Companies, respectively, the journal entries and other accounting data should be adjusted at

year-end using the equity procedure as the entities included in the joint venture have different
 4

capacities regardless of whether or not they are incorporated. In conclusion, the equity method

suits the venture than the pro-rata method because the equity method employs periodic

adjustment of entries to ascertain the reality in costs and revenues while the pro-rata method uses

the full entry procedure, which may cause inconsistencies within the accounting process and

record keeping.
 5

References

Betancourt, L., & Baril, C. P. (2013). Accounting for joint ventures moves closer to

convergence. The CPA Journal, 83(2), 26.

Gonzales, A. L. (2013). Decision Usefulness of the Equity Method of Accounting (Doctoral

dissertation, Duke University).

Sekerez, V. (2020). Informational scopes and the area of application of the equity

method. FACTA UNIVERSITATIS-Economics and Organization, 17(2), 173-186.