AFAR 1 – Accounting for Special Transactions
Lesson 10 – Joint Ventures
PFRS 11 prescribes the accounting for “joint arrangement”, which is defined as a
contractual arrangement over which two or more parties have joint control. Despite the
diverse forms and structures, all joint arrangements have two characteristics in common:
(a) The parties are bound by a contractual arrangement; and
(b) The contractual arrangement gives two or more of those parties joint control of the
arrangement.
A joint arrangement is either a joint operation or
Joint control – the contractually agreed sharing of control of an arrangement, which exists
only when decisions about the relevant activities require the unanimous consent of the
parties sharing control.
Joint operations – A joint arrangement whereby parties that have joint control of the
arrangements have rights to the assets, and obligations for the liabilities, relating to the
arrangement. Those parties are called joint operators.
Joint Venture – 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.
Party to a joint arrangement – an entity that participates in a joint arrangement, regardless
of whether that entity has joint control of the arrangement.
Separate vehicle – a separate identifiable financial structure, including separate legal
entities or entities recognized by statute, regardless of whether those entities have a legal
personality.
Classifying Joint Arrangements
The classification of a joint arrangement as a joint operation or a joint venture depends
upon the rights and obligations of the parties to the arrangement. Regardless of the
purpose, structure, or form of the arrangement, the classification of joint arrangements
depend upon the parties’ rights and obligations arising from the arrangement.
Joint Operations
A joint operator recognizes in relation to its interest in a joint operation:
• Its assets, including its share of any assets held jointly;
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•
•
•
•
Its liabilities, including its share of any liabilities incurred jointly;
Its revenue from the sale of its share of the output of the joint operation;
Its share of the revenue from the sale of the output by the joint operation; and
Its expenses, including its share of any expenses incurred jointly.
Accounting Treatment for a Joint Operation (Unincorporated Joint Operation)
If the joint operation does not sell the output produced, but rather distributes it to the
operators, there is no profit or loss account raised by the operation. In preparing accounts
for joint operation, the main purpose is to accumulate the costs as incurred. These are
capitalized into a work in progress account, which is transferred to the operators as
inventory. Further, the joint operation accounts provide information about the assets and
liabilities relating to the joint operations as well as the contributions from the operators.
Illustration 1: D Inc., E Co., and F Inc. sign an agreement to collectively purchase gas
pipeline and to hire a company to manage and operate the pipeline on their behalf. The
costs involved in running the pipeline on their behalf. The costs involved in running the
pipeline and the revenue earned from the pipeline are shared by the three parties based
on their ownership percentage. All major operating and financing decisions related to the
pipeline must be agreed to by the three companies. The cost of purchasing the pipeline
was Php50,000,000. The pipeline has an estimated 20-year useful life with no residual value.
The management fee for operating the pipeline for 2020 was Php10,000,000. Revenue
earned from the pipeline in 2020 was Php16,500,000. D invested Php15,000,000 for a 30%
interest.
D would prepare the following entries for 2020 to capture its share of the activities related
to the pipeline:
Gas Pipeline
Cash
15,000,000
Gas Pipeline Operating Expenses (30%xPhp10M)
Cash
3,000,000
Cash
4,950,000
15,000,000
3,000,000
Revenue from Pipeline (30%xPhp16.5M)
Amortization expense – pipeline (Php15M/20years)
Accum. Dep’n -gas pipeline
4,950,000
750,000
750,000
Thus, the share of D Inc. in net income of the joint operations would be as follows:
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Proportionate Share
(30%)
Revenue
Less: Operating Expenses
Amortization expenses: Php15M (30%)/20 years
Php50M (100%)/20 years
Net income of the Joint Operation
Multiplied by: 30% Interest
Net Income of D
Php 4,950,000
3,000,000
750,000
0
Php 1,200,000
Total (100%)
Php 16,500,000
10,000,000
2,500,000
Php 4,000,000
30%
Php 1,200,000
Illustration 2: Instead of contributing cash for a 30% interest in the gas pipeline, D contributed
steel pipes to be used by the company constructing the pipeline. D had manufactured the
pipes at cost of Php 11,000,000. All parties to the contract agreed that the fait value of these
pipes was Php 15,000,000 and the fair value of the pipeline once it was completed was
Php50,000,000. All other facts are the same as Illustration 1. The other operators have a 70%
interest in the joint operation.
Gas Pipeline
Steel Pipes
Gain on steel pipes (70% at gain)
Unrealized gain – contra-account (30%of gain, Php4M)
•
•
•
15,000,000
11,000,000
2,800,000
1,200,000
D should recognize a gain of Php2,800,000 (70%x (Php15M-Php11M)
A portion of the gain can be recognized on the contribution of assets to a joint
operation.
A gain can be recognized when the significant risks and rewards have been
transferred.
Amort. Exp. - Gas Pipeline (Php15M/20years)
Accum. Dep’n - Gas Pipeline
750,000
Unrealized gain – contra-account (Php1.2M/20 years)
Amortization Expense
60,000
750,000
60,000
Illustration 3: On January 1, 2020, Drei Company and Cerise Company signed an
agreement to form a joint operation to manufacture a product called hardboard. This
product is used in the packaging industry and has the advantages of the strength and
protection qualities of plywood as well as the flexibility and durability of plastic.
To commence the operation, both operators contributed Php150,000 in cash. Assume that
not all the raw materials are used during the period, and not all finished goods have been
transferred to the operators.
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The journal entries in the joint operations accounts for the year ended December 31, 2020
are as follows:
•
Contributions of Cash by the operators
Cash
300,000
Drei Company
Cerise Company
Contributions by Joint Operators
•
150,000
150,000
Use of cash and loan to buy machinery and equipment
Machinery and Equipment
80,000
Cash
Loan Payable – Machinery & equipment
Contributions by Joint Operators
Materials
65,000
Accounts Payable
Acquisition of Materials
•
50,000
30,000
65,000
Labor Incurrence
Payroll
72,000
Cash
Accrued Payroll
Annual labor
•
70,000
2,000
Loans from Bank
Cash
50,000
Bank Loan Payable
Amount borrowed
•
50,000
Repayment of Loan – machinery & equipment and other factory expenses
Loan Payable- Machinery & equipment
Cash
Partial payment of Loan
Accounts Payable
Cash
Payment of trade creditors
10,000
10,000
42,000
42,000
Factory Overhead Control – heat, light, & power
130,000
Cash
Payment of manufacturing expenses such as heat, light, and power
130,000
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•
Depreciation of Machinery and Equipment
Factory Overhead Control – Depreciation
Accumulated Depreciation
Depreciation of equipment
•
8,000
8,000
Transfer of materials, labor, and overhead to Work-in-Process
Work in Process
258,000
Payroll
Materials
Factory Overhead Control – heat, light, & power
Factory Overhead Control – Depreciation
8,000
72,000
48,000
130,000
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
•
180,000
180,000
Transfer of Finished Goods Inventory to Joint Operators throughout the year
Drei Co.
80,000
Cerise Co.
80,000
Finished Goods
160,000
Delivery of output to joint operators
The balance sheet of joint operators on December 31, 2020 would be:
Drei company and Cerise Company
Balance Sheet
December 31, 2020
Assets
Current Assets
Cash
Finished Goods Inventory
Work in Process Inventory
Materials Inventory
Total Current Assets
Non-Current Assets
Equipment
Less: Accum. Dep’n
TOTAL ASSETS
Php 48,000
20,000
78,000
17,000
Php 163,000
Php 80,000
8,000
72,000
Php 235,000
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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
Php
2,000
23,000
Php 50,000
20,000
Joint Operators Equity
Drei Company: Contributions – January 1, 2020
Cost of Inventory Distributed
Cerise Company: Contributions – January 1, 2020
Cost of Inventory Distributed
Total Joint Operator’s Equity
Php 150,000
(
80,000)
Php 150,000
(
80,000)
Php 25,000
70,000
Php 95,000
140,000
Php 235,000
Php 70,000
70,000
Php 140,000
Accounting for Joint Operations – Partnership in Nature
1. Separate records – a full set of separate accounting records may be kept for the joint
venture so that the venturers can assess the performance of the venture. The
venturers may maintain a separate record for transactions affecting them through
“Investment in Joint Venture”.
Investment in Joint Venture
• Original & additional
investment
• Services rendered to
the venture on a
compensatory basis
• Share in joint Venture
profits
• Capital withdrawals
from joint venture
• Share in joint venture
losses
• Cash settlement
2. No separate records – due to the short lifetime or size of the joint venture, it is not
considered worthwhile opening a new set of records for what may only be a few
transactions. In this case, each venturer will record transactions on behalf of the
venture in his own records, alongside his other business dealings.
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Joint Venture
• Merchandise
Contribution
• Purchases
• Freight in
• Sales return & all sales
discounts
• Expenses
• Merchandise
Withdrawals
• Merchandise returns
• Purchase returns &
Allowances
• Sales
• Other Income
If the joint venture is completed, the balance of the joint venture account represents
profit or loss. Credit balance represents profit, debit balance represents loss.
Cash Settlement – this may also be represented by the venturer’s account balance after
recording investments, withdrawals, and share in venture gain. A debit balance represents
cash to be paid in final settlement while a credit balance represents cash to be received.
The recording of the cash settlement on the books of each venture requires that:
1. All accounts, except personal accounts, be brought to zero balance; and
2. Any unaccounted debit or credit is cash to be received or paid
Cash settlement may be computed as follows:
Investments ……………………………………………………………………………Php xx
Add: Share in Venture Gain ………………………………………………………..
xx
Total ……… ……………………………………………………………………………Php xx
Less: Withdrawals …………………………………………………………………….
xx
Cash Settlement …………………………………………………………………….. Php xx
Illustration 4. Aljon, Ejay, and Mac agree to sell construction tools for a period of one month.
• Aljon agrees to construct a stand on the front lawn of Mac
• Mac will be paid Php2,500 for clearing up the lawn after the one month selling up
period.
• Aljon, Ejay, and Mac decide that net income, if any, will be allocated first by the
Php2,500 payment to Mac, and then by a 40% commission on individual sales.
• The balance will be distributed 75% to Aljon, 25% to Ejay.
• They agree that a cash box will complicate the matters and that all purchases and
sales transactions will be out-of-pocket and responsibility of the individual.
• Sales to Aljon, Ejay, and Mac are to be at cost, except that the ending inventory may
be purchased at %0% of cost
• All other sales are to be made at 100% markup on cost.
The activity of the joint operations as follows:
a. Aljon construct the stand on the front lawn at a cost of Php10,000.
b. Aljon pays for Php100,000 for various construction tools. Mac pays for Php5,000 for
permit to operate the concession or business
c. Aljon purchases additional construction tools for Php150,000, using Php50,000
contributed by Ejay and Php100,000 of personal money
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d. Sales for the period were as follows: Aljon, Php170,000; Ejay, Php260,000; and Mac,
Php60,000. Mac agrees to pay Php5,000 for the stand.
e. Mac pays Php9,000 for office supplies and these are distributed equally between
Aljon, Ejay, and Mac for their personal use at home.
f. The balance of construction tools inventory was taken by Aljon.
The summary of the transactions are as follows:
Event
a.
b.
Investment in Joint
Operation
Dr.
Cr.
Aljon
Dr.
Cr.
P 10,000
100,000
5,000
150,000
c.
d.
e.
Cash***
Settlement
Totals
0
P 265,000
232,500
P 497,500
P 497,500
Dr.
Mac
Cr.
Dr.
P 10,000
100,000
5,000
2,500
P 170,000
3,000
Cr.
P 5,000
100,000
P 490,000
f.*
NI**
Ejay
P 50,000
P 260,000
3,000
P 60,000
3,000
5,000
0
P 497,500
2,500
P 175,500
0
P 175,500
0
P 210,000
93,500
P 303,500
0
P 263,000
0
P 263,000
P 50,000
112,500
P 162,500
P 497,500
128,000
P 303,500
P 303,500
P 263,000
100,500
P 263,000
P 68,000
9,000
P 68,000
P 14,000
26,500
P 40,500
P 68,000
27,500
P 68,000
*purchases P250,000; cost of goods sold P245,000; ending inventory P5,000x50% = P2,500
**NI – Net Income Allocation
Aljon
Allowance for clearing -up operations
Commission:
Aljon: 40%x P170,000
Ejay: 40%xP260,000
Mac: 40%xP60,000
Balance (75%:25%)
Total
Ejay
Mac
P 2,500
Total
P 2,500
P 24,000
68,000
P 104,000
24,000
P 34,000
P 232,500
P 68,000
P 104,000
P 25,500
P 93,500
P 8,500
P 112,500
P 26,500
*total credits of P497,500 – total debits of P265,000 = P232,500 net income
***Cash Settlement entry
Aljon Capital
Ejay Capital
Mac Capital
128,000
100,500
27,500
Therefore, Ejay will pay P100,500 and Mac will pay P27,500 to ALjon as final settlement for
the joint operations.
Joint Ventures
A joint venture recognizes its interest in a joint venture as an investment and shall account
for that investment using the equity method in accordance with PAS 28 Investment in
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Associates and Joint ventures unless the entity is exempted from applying the equity
method as specified in the standard.
A party that participates in but does not have joint control of a joint venture accounts for its
interest in the arrangement in accordance with PFRS 9 Financial Instruments unless it has
significant influence over the joint venture in which case it accounts for it in accordance
with PAS 28.
Illustration 5. Two real estate companies set up a separate vehicle for the purpose of
acquiring and operating condominium units. One of the companies, San Company paid
P1,680,000 for a 30% interest in Anton Corporation’s (a separate vehicle) outstanding voting
stock on January 1, 2020. Such acquisition gave San Company to joint control another
company over Anton Corporation. The book values and fair values of Anton’s assets and
liabilities on January 1, along with amortization data, are as follows:
Cash
Accounts Receivable – net
Inventories (sold in 2020)
Other current assets
Land
Buildings – net (10years remaining life)
Equipment – net (7 year remaining life)
Total Assets
Anton Corp.
Book Value
P 400,000
700,000
1,000,000
200,000
900,000
1,500,000
1,200,000
P 5,900,000
Accounts Payable
Other Current Liabilities
Bonds Payable (due January 1, 2024)
Common Stock, P10 par
Retained Earnings
Total Liabilities and Stockholders’ Equity
P 800,000
200,000
1,000,000
3,000,000
900,000
P 5,900,000
Anton Corp.
Fair Value
P 400,000
700,000
1,200,000
200,000
1,700,000
2,000,000
500,000
P 6,700,000
P
800,000
200,000
1,100,000
Anton Corporation reported net income of P1,200,000 for 2020 and paid dividends of P600,000.
Schedule of Allocation and Determination of Excess
Date of Acquisition – January 1, 2020
Cost of investment
Consideration transferred
Less: Book Value of Stockholders’ Equity of San (P3Mx30%)
Retained Earnings (P900,000x30%)
Allocated excess (excess of cost over book value
Less: Over/Under valuation of its assets &liabilities:
Increase in inventory (P200,000x30%)
Increase in Land (P800,000x30%)
Increase in building (P500,000x30%)
Decrease in Equipment (P700,000x30%)
Increase in Bonds payable (P100,000x30%)
Positive excess: Goodwill (excess of cost over fair value
P1,680,000
P 900,000
270,000
P 60,000
P 240,000
P 150,000
(P210,000)
(P 30,000)
P1,170,000
P 510,000
P 210,000
P 300,000
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Over/Under valuation of assets and liabilities
Anton Corp.
Book Value
1,000,000
900,000
1,500,000
1,200,000
(1,000,000)
P 3,600,000
Inventories (sold in 2020)
Land
Buildings – net (10years remaining life)
Equipment – net (7 year remaining life)
Bonds Payable (due January 1, 2024)
Net
Anton Corp.
Fair Value
1,200,000
1,700,000
2,000,000
500,000
(1,100,000)
P 4,300,000
(Over) Under
Valuation
P 200,000
800,000
500,000
(700,000)
(100,000)
P 700,000
Summary of depreciation and amortization adjustments:
Inventories (sold in 2020)
Land
Buildings – net (10years remaining life)
Equipment – net (7 year remaining life)
Bonds Payable (due January 1, 2024)
Net
(Over) Under
Valuation
P 200,000
800,000
500,000
(700,000)
(100,000)
P 700,000
30% thereof
Life
P 60,000
240,000
150,000
(210,000)
(30,000)
P 210,000
1
10
7
5
Current year
2020
P 60,000
15,000
(30,000)
( 6,000)
P 39,000
Joint Venturer’s Equity Method Entry (Assumption: Venturer does not prepare consolidated
financial statements)
January 1, 2020
(1) Investment in Anton Corporation
Cash
Acquired 30% joint control in Anton Corp.
1,680,000
1,680,000
January 1, 2020 to December 31, 2020
(2) Cash
Investment in Anton Corp. (P600,000x30%)
Record dividends from Anton Corp.
180,000
December 31, 2020
(3) Investment in Anton Corp
Investment Income (1,200,000x30%)
Record share in net income of Anton Corp.
180,000
360,000
360,000
December 31, 2020
(4) Investment Income
39,000
Investment in Anton Corp.
Record amortization of allocated excess of inventory, equipment,
buildings, and bonds payable
39,000
Investment in Joint Venture (Anton Corp.)
Cost 1/1/2020
P1,680,000
NI of Anton Corp. 360,000
P 180,000
39,000
Dividends
Amortization
------------------------------------------
-------------------------------------
Balance 12/31/20 P1,821,000
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Investment Income
Amortization
P 39,000
------------------------------------------
P 360,000 Net Income
------------------------------------Balance 12/31/20 P321,000
Joint Venturer’s Cost Model Entry (Assumption: Venturer prepares consolidated financial
statements)
When the cost model is used, only two journal entries are recorded by San Company during
2020 related to its investment in Anton Corp.
January 1, 2020
(1) Investment in Anton Corporation
Cash
Acquired 30% joint control in Anton Corp.
January 1, 2020 to December 31, 2020
(2) Cash
Investment in Anton Corp. (P600,000x30%)
Record dividends from Anton Corp.
1,680,000
1,680,000
180,000
180,000
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