Professional Documents
Culture Documents
LECTURE NOTES
BASIC CONCEPTS
JOINT ARRANGEMENTS - an arrangement of which two or more parties have joint
control.
JOINT CONTROL - 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.
NOTES:
(1) In contrast with significant influence and control, joint control is obtained by an investor through
contractual agreement with fellow investors. No sole joint operator or venture obtains leverage
over another joint operator or joint venture in respect of voting rights over financial and
operating decisions.
(2) Joint control exists when all of the parties to the contractual arrangement act collectively (or
together) in directing the activities that significantly affect the returns of the arrangement.
TYPES OF JOINT ARRANGEMENT
The following are the types of joint arrangements under PFRS 11:
(a) JOINT OPERATION – 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.
Those parties are called JOINT OPERATORS.
(b) 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. Those parties are called JOINT
VENTURERS.
An entity applies judgment when determining the type of joint arrangement in which it is involved. Such
judgment shall be made as follows:
(1) Determine the type of joint arrangement by considering the entity’s rights and obligations arising
from the arrangement.
(2) Assess the rights and obligations by considering the following:
(a) Structure and legal form of the arrangement,
NOTE: A joint arrangement that is NOT structured through a SEPARATE VEHICLE is a JOINT
OPERATION. A joint arrangement in which assets and liabilities relating to the arrangement are
held in a SEPARATE VEHICLE can EITHER be JOINT VENTURE or JOINT OPERATION. A separate
vehicle is a separately identifiable financial structure, including separate legal entities or entities
recognized by statute, regardless of whether those entities have a legal personality.
(b) Terms of the contractual agreement,
(c) Other facts and circumstances
Joint Operation
Merchandise Contributions xx Merchandise Withdrawals xx
Purchase returns, discounts and
Purchases and Freight-in xx allowances xx
Sales returns, discounts and
allowances xx Sales and other income items xx
Expenses xx Unsold merchandise xx
Net loss xx Net income xx
NOTE: The T-account shown above is similar to an income summary account.
Each joint operator shall set-up a joint operation account and personal accounts (i.e., receivable or
payable) of other joint operators in his books.
Any cash received or paid by the manager of a joint operation is recorded by the manager in cash account
which may be described as “joint operation – cash (JO-Cash)” account.
ACCOUNTING FOR JOINT OPERATION (SEPARATE RECORDS ARE MAINTAINED)
Joint operators may want to set-up separate records for the joint operation. The separate records will be
kept by one of the joint operators – normally the appointed manager.
Each joint operator may set-up an “Interest in Joint Operation” account which will be used by each joint
operator in recording his own investments withdrawals and share in profits or losses of the joint operation.
End. Balance xx
NOTE: Investment income (share in profit or loss) is recognized only to the extent of unrelated investor’s
interests in the joint venture. Thus if a transaction is:
Advanced Financial Accounting and Reporting by Karim G. Abitago, CPA
Page 2 of 12
Aim…Believe..Claim
(a) Downstream (from venturer to joint venture) – eliminate entire unrealized profit
(b) Upstream (from joint venture to venture) – eliminate investor’s share in unrealized profit.
IFRS for SMEs provide three (3) methods of accounting for its interest in the joint venture: (a) the cost
model, (b) the fair value model, and (c) the equity model.
Year-end FV Inv. In JV xx
Adjustment P/L xx
However, when such investments are classified as held for sale in accordance with PFRS 5, they are
presented as current assets.
DISCUSSION EXERCISES
STRAIGHT PROBLEMS:
INVESTMENT IN JOINT VENTURES (FULL PFRS)
1. On January 1, 2019, RAIGOR CORP. and EARTHSHAKER INC. incorporated STONEHOOF COMPANY
which has its fiscal and operational autonomy. The contractual agreement of the incorporating entities
provided that the decisions on relevant activities of STONEHOOF will require the unanimous consent
of both entities. Both RAIGOR and EARTHSHAKER will have rights to the net assets of STONEHOOF.
Both entities invested P500,000 each equivalent to 40:60 capital interest of STONEHOOF COMPANY.
The financial statements of the joint venture for its 3-year operation are as follows:
2. On January 1, 2019, MOGUL CORP. and AXE INC. incorporated DOTA INC. by investing P1,000,000
and P2,000,000, respectively for a capital ratio of 60:40. The contractual agreement of the
incorporating entities provided that the decisions on relevant activities of DOTA will require the
unanimous consent of both entities. Both MOGUL and AXE will have rights to the net assets of DOTA.
During 2019, DOTA’s financial statements provided the following data:
DOTA reported a net income of P1,000,000 for 2019 and paid cash dividends of P400,000 on
December 31, 2019.
During 2019, MOGUL sold inventory to DOTA for P100,000 with a 40% gross profit on the
transaction. 80% of the goods sold were sold by DOTA to third parties during the year.
During 2019, DOTA sold inventory to AXE for P200,000 with a 30% gross profit on the
transaction. 60% of the goods were sold by AXE to third parties during the year.
On July 1, 2019, DOTA sold MOGUL a machinery at a loss of P50,000. At the time of sale, the
machinery has remaining useful life of 2 years.
On October 1, 2019, AXE sold DOTA an equipment at a gain of P90,000. At the time of sale, the
machinery has a remaining life of 3 years.
REQUIREMENTS: (a) What is the investment income to be reported by MOGUL and AXE for the year
ended 2019? (b) What is the balance of investment in DOTA INC. be reported by MOGUL and AXE on
December 31, 2019?
MOGUL AXE
Share in net income (1M x 60%) P600,000 (1M x 40%) P400,000
Downstream sale of inventories:
(P40,000 x 20%) (8,000) -
Upstream sale of inventories:
- (P60,000 x 40% x 40%) (9,600)
Upstream sale of depreciable asset:
(50,000 x (1.5/2) x 60%) 22,500
Downstream sale of depreciable asset:
_______ (90,000 x (2.75/3) (82,500)
Investment Income P614,500 P307,900
Dividends received (400,000 x 60%) (240,000) (400,000 x 40%) (160,000)
Beginning balance 1,000,000 2,000,000
Investment balance P1,374,500 P2,147,900
5. ABADDON INC., BALANAR CORP. and CLINKZ CO. agreed to form a joint operation. Profit or loss of
the joint operation shall be divided equally. The following were the transactions during the year:
Inventory costing P100 was sent by ABADDON to CLINKZ.
Freight paid by ABADDON on the inventories sent to BALANAR amounted to P5.
Cash of P200 was sent by CLINKZ to BALANAR to be used to purchase additional inventory.
BALANAR purchased additional inventory amounting to P250, P50 of which were made on
account of BALANAR.
Cash sales made by BALANAR amounted to P800.
Operating expenses amounting to P55 were paid by BALANAR using his own cash.
Unsold inventories at year-end amounted to P30 and CLINKZ is charged the unsold inventory at
cost.
REQUIREMENTS: (a) Journalize the transactions above assuming there is a separate books
maintained and no separate books maintained; (b) Compute for the joint operation net income (loss)
and the final cash settlement for each joint operator.
SOLUTION:
NO SEPARATE BOOKS
BOOKS OF A BOOKS OF B BOOKS OF C
A Joint Operation 100 Joint Operation 100 Joint Operation 100
Inventory 100 Payable to A 100 Payable to A 100
B Joint Operation 5 Joint Operation 5 Joint Operation 5
Cash 5 Payable to A 5 Payable to A 5
C Joint Operation 200 Joint Operation 200 Joint Operation 200
Payable to C 200 Payable to C 200 Cash 200
D Joint Operation 50 Joint Operation 250 Joint Operation 50
Payable to B 50 JO - Cash 200 Payable to B 50
AP 50
E Rec. from B 800 JO - Cash 800 Rec. from B 800
Joint Operation 800 Joint Operation 800 Joint Operation 800
F Joint Operation 55 Joint Operation 55 Joint Operation 55
Payable to B 55 Cash in bank 55 Payable to B 55
Joint Operation
10
Merchandise Contributions 0 Merchandise Withdrawals -
Purchase returns, discounts and
Freight-in 5 allowances -
25 80
Purchases 0 Sales and other income items 0
Expenses 55 Unsold merchandise 30
42
Net income 0
SEPARATE BOOKS
10
Inventory 0
A
10
A, Capital 0
Freight-in 5
B
A, Capital 5
20
Cash 0
C
20
C, Capital 0
25
Purchases 0
D
20
Cash 0
B, Capital 50
80
Cash 0
E
80
Sales 0
Expenses 55
F
B, Capital 55
Inventory, end 30
80
Sales 0
10
Inventory, beg. 0
G Freight-in 5
25
Purchases 0
Expenses 55
42
Income summary 0
42
Income summary 0
14
H. A, Capital 0
1 14
B, Capital 0
14
C, Capital 0
H. C, Capital 30
2 Inventory, end 30
6. AKASHA INC., BANE CORP. and CHEN CO. The joint operators shall make initial contributions P10,000
each. Profit and loss shall be divided equally. The following data relate to the joint operation’s
transactions:
AKASHA BANE CHEN
Joint Operation P8,000 cr. P10,000 cr. P12,000 cr.
Expenses paid from JO cash 5,000 2,000 3,000
Value of inventory taken 5,000 6,000 4,000
REQUIREMENTS: (a) Compute for the joint operation’s sales; (b) Determine the cash settlement to
AKASHA.
Joint Operation
30,00 70,00
Initial Contributions 0 Sales and other income items 0
10,00
Expenses 0
Credit balance 30,000
Joint Operation
Initial Contributions 30,000 Sales and other income items 70,000
Expenses 10,000 Unsold merchandise 15,000
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.
5. 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 C. Both I and II
B. II only D. Neither I nor II
6. Under PFRS for SMEs, how shall the joint venture account for its Investment in Joint Venture?
A. Equity method C. Fair value through profit or loss under PFRS 9
B. Cost method D. Any of the above
7. An entity that participates in a joint arrangement is referred to under PFRS 11 as
A. party to a joint arrangement
B. joint arranger
C. choice A only if the party obtains joint control
D. choice B regardless of whether the party obtains joint control
8. The main consideration when classifying a joint arrangement into either joint operation or joint
venture is
A. the existence of a contractual arrangement resulting to a joint control by all or some of the
contracting parties.
B. the existence or non-existence of a separate vehicle.
C. the duration of the contractual arrangement - a relatively short-term agreement is classified as
a joint operation.
D. the nature of the rights and obligations of the parties arising from the arrangement.
9. A and B agreed to combine their operations, resources and expertise to manufacture, market and
distribute jointly a particular product. Different parts of the manufacturing process are carried out by
each of the parties. Each of the party bears its own costs and takes a share of the revenue from the
sale of the product equally. Which of the following statements is correct?
A. The joint arrangement is classified as a joint operation because the joint arrangement is not
structured through a separate vehicle.
B. The joint arrangement is classified as a joint venture because the joint arrangement is not
structured through a separate vehicle.
C. The joint arrangement is classified as a joint operation because the joint arrangement is
structured through a separate vehicle.
D. The joint arrangement is classified as a joint venture because the joint arrangement is
structured through a separate vehicle.
10. 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 C. Either joint venture or joint operation
B. Joint operation D. Neither joint venture nor joint operation
11. THE APPLE COMPANY, THE BERRY COMPANY and THE CHERRY COMPANY own 30%, 30% and 40%
respectively of the equity of THE DAMSON COMPANY. APPLE and BERRY have signed an agreement
whereby the strategic decisions in respect of DAMSON are to be taken with the agreement of both of
them. Are the following statements true or false, according to FPRS 11, Joint Arrangements?
I. CHERRY is an investor in DAMSON.
II. APPLE should account for its share in the profits of DAMSON by reference to the dividends
receivable from DAMSON
A. False, false C. True, false
B. False, true D. True, true
12. 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.
13. Which of the following is correct?
A. All joint arrangements are not structured through a separate vehicle are classified as joint
ventures
B. For a joint venture, the rights pertain to the rights and obligations associated with individual
assets and liabilities, whereas with a joint operation, the rights and obligations pertain to the
net assets
C. In considering the legal form of the separate vehicle if the legal form establishes rights to
individual assets and obligations, the arrangement is a joint operation. If the legal form
establishes rights to the net assets of the arrangement, then the arrangement is a joint venture.
D. Where the joint operators have designed the joint arrangement so that its activities primarily
aim to provide the parties with an output it will be classified as a joint-control?
14. A joint arrangement classified as joint venture may be accounted for using the following methods:
A) Equity method C) Fair value method
B) Cost method
FULL IFRS SME
A. A, B & C A, B & C
B. A only A, B & C
C. A, B & C A only
D. A&C B&C
15. Under PFRS 11, which is incorrect about the accounting treatment by non-SME Venturer of its
Investment in Joint Venture?
A. The venturer shall recognize impairment loss on Investment in Joint Venture if the book value of
the investment is lower than its recoverable amount which is the higher between value in use or
fair value less cost to sell.
B. The venturer shall recognize cash or property dividend from joint venture as dividend income
when its right to receive dividend is established.
C. The venturer shall recognize its share in the net invoke of the joint venture as investment
income with corresponding increase to investment in joint venture.
D. The-venturer shall recognize its share in the net loss of the joint venture as investment loss with
corresponding decrease to investment m joint venture,
PROBLEMS
Use the following information in answering the next item(s):
On January 1, 2018, SVEN CORP., a public entity and TINY INC., a public entity, incorporated
KUNKKA CO. which has its fiscal and operational autonomy. The contractual agreement of the
incorporating entities provided that the decisions on relevant activities of KUNKKA will require the
unanimous consent of both entities. SVEN and TINY will have rights to the net assets of KUNKKA.
SVEN and TINY invested P1,000,000 and P1,500,000, respectively, equivalent to 40:60 capital
interest of KUNKKA. The financial statements of KUNKKA provided the following data for its two-year
operation:
NET INCOME (LOSS) DIVIDENDS DECLARED
2018 200,000 100,000
2019 (2,000,000) -
1. What is the balance of Investment in KUNKKA CO. to be reported by SVEN in its Statement of
Financial Position on December 31, 2019?
A. P1,080,000 C. P240,000
B. P1,040,000 D. P200,000
2. What is the balance of Investment in KUNKKA CO. to be reported by TINY in its Statement of
Financial Position on December 31, 2019?
A. P1,500,000 C. P360,000
B. P1,620,000 D. P900,000
3. On January 1, 2018, BEASTMASTER CORP. a public entity, invested P 1,000,000 in a joint venture for
50% capital interest. The following transactions occurred:
On July 1, 2018, the joint venture sold equipment to BEASTMASTER CORP. at a gain of P60,000.
The equipment has remaining useful life of 5 years at the time of sale.
On December 1, 2018, the joint venture sold inventory to BEASTMASTER CORP. at a gross profit
of P100,000. BEASTMASTER was able to sell 60% of the said inventory to third person during
2018. Afterwards, BEASTMASTER was able to sell 30% of the said inventory to third person
during 2019 and the remainder during 2020.
On October 1, 2019, the joint venture sold a land to BEASTMASTER at a loss of P50,000. On
April 1, 2020, BEASTMASTER was able to sell the land to third person.
The financial statements of Entity C provided the following data for its three year operation:
Net Income (Net Loss) Dividend Declaration
2018 P 500,000 P 100,000
2019 (P 2,500,000)
2020 P 3,000,000 P 200,000
What is the investment income to be reported by BEASTMASTER in relation to its Investment in Joint
Venture in its Statement of Comprehensive Income for the year ended December 31, 2020?
A. 1,536,000 C. 1,486,000
B. 1,435,000 D. 1,492,000
Use the following information in answering the next item(s):
On January 1, 2015, SME DAVION CORP. acquired a 35% equity of HUSKAR CORP. for P37,000.
SME DAVION shares in the joint control over the strategic financial and operating decisions of
HUSKAR CORP. Transactions costs of 5% of the purchase price of the shares were incurred by
SME DAVION.
On December 31, 2015, HUSKAR declared and paid a dividend of P24,000 for the year ended
2015. HUSKAR recognized a profit of P18,000 for that year.
Published price quotations do not exist for the shares of HUSKAR. Using appropriate valuation
techniques SME DAVION determined the fair value of its investment in HUSKAR at December
31, 2015 as P49,000. Costs to sell are estimated at 9% of the fair value of the investments.
SME DAVION does not prepare consolidated financial statements because it does not have any
subsidiary.
4. What is the profit (loss) of SME DAVION to be presented in the income statement for HUSKAR CORP.
using the fair value method?
A. P20,400 C. P15,990
B. P18,550 D. P14,140
5. What is the profit (loss) of SME DAVION to be presented in the income statement for HUSKAR CORP.
using the cost model?
A. P(8,575) C. P 5,250
B. P 8,400 D. P(1,750)
6. What is the investment balance of SME DAVION at the end of the year in HUSKAR CORP. using the
fair value method?
A. P52,325 C. P49,000
B. P57,575 D. P47,075
7. What is the investment balance of SME DAVION at the end of the year in HUSKAR CORP. using the
equity method?
A. P38,850 C. P34,125
B. P42,525 D. P36,750
Use the following information in answering the next item(s):
JJ, DD and AA formed a joint operation for the sale of assorted fruits during the Christmas season.
Their transactions during the two-month period are summarized below.
Investment in Joint Operation
Nov. 6 Merchandise - JJ P8,500 Nov.10 Cash sales-AA P20,400
8 Merchandise - DD 7,000 12 Cash sales - AA 4,200
10 Freight-in - AA 200 28 Merchandise - DD 1,210
Dec. 8 Purchases - AA 3,500 Dec.30 Unsold merchandise
14 Selling expenses - AA 550 charged to JJ 540
The joint arrangements provided for the division of gains and losses among JJ, DD and AA in the ratio
of 2:3:5. The joint operation is to close on December 31, 2013.
8. The joint operation profit (loss) is:
A. P6,600 C. P6,060
B. (6,600) D. (6,060)
10. The balance of the joint operations account before profit or loss distribution is:
A. P4,900 C. 14,400
B. 14,000 D. None
12. How much would Anson receive in the final settlement assuming he took the unsold merchandise at
cost?
A. P13,000 C. P8,475
B. P12,625 D. P8,515
15. Determine the amount of NAGA SIREN will show the Equipment in JO account in its balance sheet at
January 1, 2015.
A. P61,667 C. P66,667
B. P50,000 D. P65,000
16. Determine the amount of NAGA SIREN will show the Equipment in JO account in its balance sheet at
December 31, 2015.
A. P45,000 C. P60,000
B. P55,000 D. P58,800
17. Determine the net amount PHANTOM LANCER or RIKI CORP. will show the Equipment in JO account in
its balance sheet at December 31, 2015.
A. P45,000 C. P60,000
B. P55,500 D. P58,500
2021 (P6,000,000) -
2022 P7,000,000 P500,000
18. What is the book value of Investment in Joint Venture to be reported by SILENCER INC. as of
December 31, 2020?
A. P1,600,000 C. P2,5000,000
B. P2,350,000 D. P1,450,000
19. What is the share in net or investment loss to be reported by SILENCER for the year ended December
31, 2021?
A. P3,000,000 C. P2,350,000
B. P2,500,000 D. P2,000,000
20. What is the book value of Investment in Joint Venture to be reported by SILENCER INC. as of
December 31, 2022?
A. P1,600,000 C. P1,250,000
B. P2,600,000 D. P1,450,000
- END OF HANDOUTS -