Joint Venture Worked Example Situation 1 – Separate Books of Account

Question 5 A–½;B–½

Capital contributed

Joint Venture Account

Amit: Rent 600 Amit: Sales 700
Bonnie: Equipment 1 100 Bonnie: Sales 3 300
Joint Venture Bank: Purchases 8 080 Joint Venture Bank: Sales 6 100
Joint Venture Bank: Other Joint Venture Bank:
running expenses 620 Equipment 1 100
Share of profit
- Amit (1/2 X 800) 400
- Bonnie (1/2 X 800) 400
11 200 11 200
 Bonnie Account
Joint Venture: Sales 3 300 Joint Venture Bank: Capital 850
Joint Venture: Equipment 1 100
Share of profit 400
Joint Venture Bank ?
3 300 3 300

Gross profit of first joint venture = Revenue – Purchases

= (700 + 3 300 + 6 100) – 8 080 = 10 100 – 8 080 = $2 020
Gross profit margin = (2 020 / 10 100) X 100 = 20%

New gross profit margin = 20 + 10 = 30%

New revenue = 10 100 X 2 = $20 200
New gross profit = 30% X 20 200 = $6 060

Increase in gross profit = 6 060 – 2 020 = $4 040

The increase in gross profit of $4 040 is greater than the increase in rent of $1
500. An additional profit of $2 540 can be made. With the doubling of units
sold, other costs are likely to increase which might reduce profit. The doubling
of units sold with selling price remaining constant is an unrealistic assumption.
It is not likely that the gross will increase. There will be an increase in risk
because of the increase in rent which is fixed cost which will have to be paid
even if no profit is made. If sales do not increase, the increase in rent will wipe
off the profit completely.
It is advisable to enter the proposed joint venture because an additional profit
can be made.

They have both taken out of the business more than what they are entitled or
the business has been making losses. They both owe money to the business.