Joint Arrangements PDF

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JOINT ARRANGEMENTSProblem I 1. Contributions of cash by the operators Cash 360, KK Company 180, Cerise Company 180, Contribution by joint operators. Use of cash and loan to buy machinery & equipment and raw materials Machinery and equipment 96, Cash 60, Loans payable – machinery and equipmen...

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JOINT ARRANGEMENTS Problem I 1. • Contributions of cash by the operators Cash KK Company Cerise Company Contribution by joint operators.

360,000 180,000 180,000

• Use of cash and loan to buy machinery & equipment and raw materials Machinery and equipment 96,000 Cash Loans payable – machinery and equipment Contribution by joint operators. Materials Accounts payable Acquisition of materials. • Labor incurrence Payroll Cash Accrued payroll Annual labor. • Loans from the bank Cash Bank loans payable Amount borrowed.

78,000 78,000

86,400 84,000 2,400

72,000 72,000

• Repayment of loan – machinery and equipment and other factory expenses Loan payable – machinery and equipment 12,000 Cash Partial payment of loan. Accounts payable Cash Payment of trade creditors. Factory overhead control – heat, light and power Cash Payment of manufacturing expenses such as heat, light and power. • Depreciation of machinery and equipment Factory overhead control – depreciation Accumulated depreciation Depreciation of equipment.

60,000 36,000

12,000

50,400 50,400

156,000 156,000

9,600 9,600

• Transfer of materials, labor and overhead to Work-in-Process Work-in-process Payroll Materials Factory overhead control – heat, light and power Factory overhead control – depreciation Allocation of costs to work-in-process • Transfer of Work-in-Process to Finished Goods Inventory. Finished goods Work-in-process Allocation to finished goods

309,600 86,400 57,600 156,000 9,600

216,000 216,000

• Transfer of Finished Goods Inventory to Joint Operators throughout the year KK Company 96,000 DD Company 96,000 Finished goods Delivery of output to joint operators.

192,000

2. Contribution – Drei Contribution – Cerise Bank loan

Balance, 12/31/x4

180,000 180,000 60,000

Cash 60,000 84,000 12,000 50,400 156,000

Machinery and equipment Labor Machinery and equipment Accounts payable Factory overhead control

57,600

Work-in-Process Labor 86,400 216,000 Materials 57,600 Factory Overhead – heat, etc. 156,000 Factory Overhead – depreciation 9,600 Balance, 12/31/x4 93,600

to Finished Goods

3. a. Total assets, P282,000 b. KK’s investment, P84,000 c. DD’s investment, P84,000 December 31, 20x4 Assets Current Assets Cash Finished goods inventory Work-in-Process inventory Materials inventory Total current assets Non-current Assets Equipment

P 57,600 24,000 93,600 20,400 P 195,600 P 96,000

Less: Accumulated depreciation Total Assets Liabilities and Net Assets Current Liabilities Accrued payroll Accounts payable Non-current Liabilities Bank loan payable Loan payable – machinery and equipment Total Liabilities Net Assets Total Liabilities and Net Assets Joint Operator’s Equity KK Company: Contributions – January 1, 20x4 Cost of inventory distributed DD Company: Contributions – January 1, 20x4 Cost of inventory distributed Total Joint Operator’s Equity

9,600

P

2,400 27,600

P 60,000 24,000

P 180,000 ( 96,000) P 180,000 ( 96,000)

86,400 P282,000

P 30,000

__84,000 P 114,000 168,000 P282,000

P 84,000

P 84,000 P168,000

Problem II 1. Oil Pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18,000,000

Oil Pipeline operating expenses (30% x P12,000,000). . . . . . . . . . . . . . Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,600,000

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenue from Oil Pipeline (30% x P19,800,000) . . . . . . . . . . . . . . . .

5,940,000

Amortization expense – pipeline (P18,000,000/20 years). . . . . . . . . . . Accumulated depreciation – oil pipeline. . . . . . . . . . . . . . . . . . . . .

900,000

18,000,000

3,600,000

5,940,000

900,000

Thus, the share of X Inc. in net income of the joint operations would be as follows:

Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization expense: P18,000,000 ( 30%) / 20 years. . . . . . . . P60,000,000 (100%) / 20 years. . . . . . . . Net Income of the Joint Operation. . . . . . . . . . . . . . . . . . . . . . . . . . . . Multiplied by: 30% interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Income of X. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Proportionate Share (30%) P 5,940,000 3,600,000 900,000

__________ P 1,440,000

Total (100% based) P19,800,000 12,000,000 _3,000,000 P 4,800,000 ______30% P 1,440,000

Problem III 1. The following journal entries would be recorded: Pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Steel Pipes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on steel pipes (70%* of gain). . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain – contra account (30% of gain, P4,800,000) . . . .

18,000,000 13,200,000 3,360,000 1,440,000

The following should be observed in relation to the above journal entry: • X should recognize a gain of P3,360,000 [70% x (P18,000,000 – P13,200,000)]* •

A portion of the gain can be recognized on the contribution of assets to a joint operation. PFRS 11 indicates the following: When an entity enters into a transaction with a joint operation in which it is a joint operator, such as a sale or contribution of assets, it is conducting the transaction with the other parties to the joint operation and, as such, the joint operator shall recognize gains and losses resulting from such a transaction only to the *extent of the other parties’ interests in the joint operation. When such transactions provide evidence of a reduction in the net realizable value of the assets to be sold or contributed to the joint operation, or of an impairment loss of those assets, those losses shall be recognized fully by the joint operator.

•

A gain can be recognized when the significant risks and rewards have been transferred. Pipeline operating expenses (30% x P12,000,000). . . . . . . . . . . . . . . . . Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,600,000

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenue from Pipeline (30% x P19,800,000) . . . . . . . . . . . . . . . . . . . Amortization expense – pipeline (P18,000,000/20 years). . . . . . . . . . . Accumulated depreciation - pipeline. . . . . . . . . . . . . . . . . . . . . . .

5,940,000

Unrealized gain – contra account (P1,440,000/ 20 years). . . . . . . . . . Amortization expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

72,000

3,600,000

5,940,000 900,000 900,000

72,000

The following should be observed in relation to the above journal entry: • The joint operator’s own interest in the gain is recognized over the life of the asset. •

The unrealized gain is a contra account to the pipeline account; it should not be reported as a deferred gain on the liability side of the balance sheet. When X Inc., prepares a balance sheet, the unrealized gain will be offset against the pipeline such that the pipeline’s net cost is P16,560,000 (P18,000,000 – P1,440,000). As the net cost of the pipeline is being amortized, the unrealized gain account is also being amortized. In effect, the unrealized gain is being brought into income over the life of the pipeline. As the pipeline is being used to generate revenue on transactions with outsiders, the operator’s own share of the unrealized gain is being recognized in net income. This is similar to what happened in Chapter 18 (Intercompany Sales of Property and Equipment) of Volume II, when the unrealized profits from an intercompany sale of a depreciable asset were realized over the life of the depreciable asset.

Thus, the share of X Inc. in net income of the joint operation would be as follows: Revenue (30% x P19,800,000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Operating expenses (30% x P12,000,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization expense: P60,000,000 x 30% = P18,000,000 / 20 years. . . . . . . . . . . Add: Gain on steel pipes [70%* x (P18 ,000,000 – P13,200,000)] . . . . . . . . . . . . . . . . . Realized gain – amortization**(P1,440,000/20 years). . . . . . . . . . . . . . . . . . . . . . . Net Income of X. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 5,940,000 3,600,000 900,000 3,360,000 _____72,000 P 4,872,000

* PFRS 11 states that: “When an entity enters into a transaction with a joint operation in which it is a joint operator, such as a sale or contribution of assets, it is conducting the transaction with the other parties to the joint operation and, as such, the joint operator shall recognize gains and losses resulting from such a transaction only to the *extent of the other parties’ interests in the joint operation.” ** Sales price of P18,000,000 – P13,200,000, cost of steel pipes = P4,800,000 x 30% = P1,440,000

2. refer to the above entry Gain on steel pipes (70%* of gain). . . . . . . . . . . . . . . . . . . . . . . . . . .

P3,360,000

Unrealized gain – contra account (30% of gain, P4,800,000) . . . .

P1,440,000

3. Amortization expense – pipeline (P18,000,000/20 years). . . . . . . . . . . Less: Amortization expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization expense for the year…………………………………………

P 900,0000 ____72,000 P 828,000

Pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Net unrealized gain, end of 20x4: Unrealized gain – contra account (30% of gain, P4,800,000) . . Less: Amortization for 20x4…………………………………………… Net cost of Oil Pipeline……………………………………………………….

P18,000,000

4.

P1,440,000 ____72,000

__1,368,000 P16,632,000

Problem IV The joint operator, Entity K account for their interests in the joint operation as follows: January 1, 20x4 (P12,000,000 / 5 = P2,400,000) Property, plant and equipment (interest in an aircraft) Cash To recognize the purchase of an ownership-interest in a jointly controlled aircraft.

2,400,000 2,400,000

In 20x4 Cash Profit or loss (rental income) To recognize income earned in renting to others the use of the aircraft in 20x4.

12,000 12,000

Profit or loss (aircraft operating expenses) Cash To recognize the costs of running an aircraft in 20x4.

180,000

Profit or loss (depreciation expense) Accumulated depreciation (interest in an aircraft To recognize depreciation of an ownership-interest in a jointly controlled aircraft in 20x4: P12,000,000/20 years = P600,000/5 operators = P120,000 share for each joint operator.

120,000

180,000

120,000

Problem V 1. The joint operator, Entity A account for their interests in the joint operation as follows: Entity X—in 20x4 Profit or loss (construction costs) Cash/Accumulated depreciation/Trade payables To recognize the construction costs incurred in 20x4

4,800,000

Cash Profit or loss (construction revenue) To recognize the construction costs incurred in 20x4

8,400,000

Entity Y —in 20x4

4,800,000

8,400,000

Profit or loss (construction costs) Cash/Accumulated depreciation/Trade payables To recognize the construction costs incurred in 20x4

7,200,000

Cash Profit or loss (construction revenue) To recognize the construction costs incurred in 20x4

8,400,000

7,200,000

8,400,000

Problem VI 1. The following are the summaries of the above transactions for a joint operation in the form of a partnership:

Event a. b. c. d. e. f. * NI** Cash*** Settlement Totals

Investment in Joint Operation Dr. Cr. P 12,000 120,000 6,000 180,000 P588,000

AA Dr.

BB Cr. P12,000 120,000

Dr.

CC Cr.

Dr.

Cr.

P 6,000 120,000 P204,000 3,600

P60,000 P312,000 3,600

________ P318,000 _297,000 P597,000

6,000 ___3,000 P597,000 ________ P597,000

___3,000 P210,600 ________ P210,600

________ P252,000 __112,200 P364,200

________ P315,600 ________ P315,600

______ P 60,000 _147,000 P195,000

P72,000 3,600 6,000 _______ P81,600 _______ P81,600

_______ P597,000

________ P597,000

_153,600 P364,200

________ P364,200

________ P315,600

_120,600 P315,600

_______ P81,600

10,800 _______ P 16,800 31,800 P48,600

_33,000 P81,600

* purchases, P300,000; cost of goods sold, P294,000; ending inventory P6,000 x 50% = P3,000. **NI – Net Income Allocation AA BB CC Allowance for cleaning-up operations P 3,000 Commission: Aljon: 40% of P204,000 P81,600 Elerie: 40% of P312,000 P124,800 Mac: 40% of P72,000 28,800 Balance (75%: 25%) 30,600 10,200 _______ Total P112,200 P135,000 P31,800 **Total credits of P597,000 – Total debits of P318,000 = P279,000, net income.

P

Total 3,000

81,600 124,800 28,800 40,800 P279,000

2. The cash settlement entry (refer to No. 1 for the computation of settlement) would be as follows: AA, capital 153,600 BB, capital 120,600 CC, capital 33,000 Therefore, BB will pay P120,600 and CC will pay, P33,000 to AA as final settlement for the joint operations.

Problem VII 1. Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4 Cost of investment Consideration transferred Less: Book value of stockholders’ equity of Son: Common stock (P3,600,000 x 30%) Retained earnings (P1,080,000 x 30%) Allocated excess (excess of cost over book value) Less: Over/under valuation of assets and liabilities: Increase in inventory (P240,000 x 30%) Increase in land (P960,000 x 30%) Increase in building (P600,000 x 30%) Decrease in equipment (P840,000 x 30%) Increase in bonds payable (P120,000 x 30%)

P2,016,000 P 1,080,000 324,000 P 72,000 288,000 180,000 ( 252,000) ( 360,000)

1,404,000 612,000

P

Positive excess: Goodwill (excess of cost over fair value)

252,000 P 360,000

The over/under valuation of assets and liabilities are summarized as follows: AA Co. AA Co. Book value Fair value Inventories (sold in 20x4) P1,200,000 P1,440,000 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 Bonds payable (due January 1, 20x9) ( 1,200,000) (1,320,000) Net P4,320,000 P5,160,000 A summary or depreciation and amortization adjustments is as follows: Over/ 30% Account Adjustments to be amortized Under thereof Inventories (sold in 20x4) P 240,000 P 72,000 Land 960,000 288,000 Buildings – net ( 10 year remaining life) 600,000 180,000 Equipment – net ( 7 year remaining life) ( 840,000) ( 252,000) Bonds payable (due January 1, 20x9) ( 120,000) ( 36,000) Net P 840,000 P 252,000

Life 1 10 7 5

(Over) Under Valuation P 240,000 960,000 600,000 ( 840,000) ( 120,000) P 840,000

Current Year(20x4) P 72,000 18,000 (36,000) ( 7,200) P 46,800

2. The following are entries recorded by the parent in 20x4 in relation to its investment in joint venture: January 1, 20x4: (1) Investment in AA Company 2,016,000 Cash 2,016,000 Acquired 30% joint control in AA Company. January 1, 20x4 – December 31, 20x4: (2) Cash Investment in AA Company (P720,000 x 30%) Record dividends from AA Company. December 31, 20x4: (3) Investment in AA Company

216,000 216,000

432,000

Investment income (P1,440,000 x 30%) Record share in net income of AA Company. December 31, 20x4: (4) Investment income Investment in AA Company……………………. Record amortization of allocated excess of inventory, equipment, buildings and bonds payable.

432,000

46,800 46,800

3. Thus, the investment balance and investment income in the books of SS Company (the Joint Venturer) is as follows:

Cost, 1/1/x4 NI of AA (1,440,000 x 30%) Balance, 12/31/x4

Amortization

Investment in Joint Venture (AA Company) 2,016,000 216,000 Dividends – Son (720,000x 80%) 46,800 Amortization 432,000 2,185,200 Investment Income 46,800 432,000 385,200

NI of AA (P1,440,000 x 30%) Balance, 12/31/x4

To check the balance of Investment in Joint Venture ( AA Company): AA Company’s Stockholders’ Equity, 12/31/20x4: Common stock Retained earnings Retained earnings,1/1/20x4 P 1,080,000 Net income – 20x4 1,440,000 Dividends – 20x4 ( 720,000) Book value of stockholders’ equity of AA Company,12/31/20x4 Multiplied by: Interest in Joint Venture Book value of Interest in Joint Venture Add: Unamortized allocated excess – 30% thereof P252,000 – P46,800, amortization) Goodwill Investment in Joint Venture (AA Company) – equity method Problem VIII 1. Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4 Cost of investment Consideration transferred Less: Book value of stockholders’ equity of Son: Common stock (P3,600,000 x 30%) Retained earnings (P1,080,000 x 30%) Allocated excess (excess of cost over book value) Less: Over/under valuation of assets and liabilities: Increase in inventory (P240,000 x 30%) Increase in land (P960,000 x 30%) Increase in building (P600,000 x 30%)

P3,600,000

1,800,000 P5,400,000 30% P1,620,000 205,200 360,000 P2,185,200

P2,016,000 P 1,080,000 324,000 P P

72,000 288,000 180,000

1,404,000 612,000

Decrease in equipment (P840,000 x 30%) Increase in bonds payable (P120,000 x 30%)

( 252,000) ( 360,000)

252,000

Positive excess: Goodwill (excess of cost over fair value)

P 360,000

The over/under valuation of assets and liabilities are summarized as follows: AA Co. AA Co. Book value Fair value Inventories (sold in 20x4) P1,200,000 P1,440,000 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 Bonds payable (due January 1, 20x9) ( 1,200,000) (1,320,000) Net P4,320,000 P5,160,000 A summary or depreciation and amortization adjustments is as follows: Over/ 30% Under thereof Account Adjustments to be amortized Inventories (sold in 20x4) P 240,000 P 72,000 Land 960,000 288,000 Buildings – net ( 10 year remaining life) 600,000 180,000 Equipment – net ( 7 year remaining life) ( 840,000) ( 252,000) Bonds payable (due January 1, 20x9) ( 120,000) ( 36,000) Net P 840,000 P 252,000

(Over) Under Valuation P 2...