PrE 7 ACCOUNTING FOR BUSINESS COMBINATIONS
ICI - CBEA
JOINT ARRANGEMENTS
TRUE OR FALSE:
1. Joint control distinguishes an interest in a joint arrangement from other types of investment.
2. A joint arrangement exists only if decisions on relevant activities require the unanimous consent of all the
participants to the arrangement.
3. Joint control exists when no single party is in a position to control the activity unilaterally.
4. According to PFRS 11, a joint arrangement whereby the parties that have joint control have rights to the
assets and obligations for the liabilities of the arrangement is classified as a joint venture.
5. A and B enter into a joint arrangement structured through a separate vehicle. The separate vehicle
obtains control over the asset contributions of A and B. In return, A and B have equal interests in the
separate vehicle’s net assets and profit. A and B’s joint arrangement is most likely a joint venture.
Use the following information for the next three questions:
A and B enters into a contract to contribute cash to acquire a taxi. A and B will have joint control over the
operation of the taxi and will share equally in the revenues and expenses.
6. The contract between A and B is a joint venture.
7. A and B are referred to as joint taxi venturers.
8. The taxi is referred to in PFRS 11 as separate vehicle.
9. A joint operator accounts for its interest in a joint arrangement using the equity method.
10. Under the equity method, dividends received from the investee are treated as dividend income.
MULTIPLE CHOICE – THEORIES
1. Which of the following is an essential element of a joint arrangement?
a.
b.
c.
d.
Significant influence
Control
Joint control
Joint venture
2. A, B, and C are parties to a joint arrangement with the following voting rights: A = 40%, B = 35% and C =
25%. The arrangement stipulates that management decisions require the ratification of at least 75% of the
voting rights. Which of the following statements is current?
a. The arrangement is not a joint arrangement within the scope of PFRS 11 because not all the parties
have joint control.
b. The arrangement is a joint arrangement only from the viewpoints of A and B.
c. The contractual stipulations imply that A and B has joint control over the arrangement.
d. All of these statements are correct.
3. Read Co. and Learn Co., national distributors of textbooks, enter into a contract to acquire a warehouse
in a particular region. Each party will use the warehouse to store its own inventories. The parties agree to
share in the costs of acquiring and maintaining the warehouse. Under PFRS 11, the arrangement between
Read and Learn is most likely a
a.
b.
c.
d.
Joint operation
Jointly controlled asset
Joint venture
None of these
PrE 7 ACCOUNTING FOR BUSINESS COMBINATIONS
ICI - CBEA
4. A joint arrangement whereby the parties have joint control of the arrangement have rights to the net
assets of the arrangement.
a.
b.
c.
d.
Joint operation
Joint venture
Joint arrangement
Two joints
5. A party that has a joint control of a joint operation is called a
a.
b.
c.
d.
Joint operationalist
Joint venturer
Joint arranger
Joint operator
6. In financial statements that are not separate financial statements, how should a joint venturer account
for its interest in a joint arrangement?
a. As an investment measured either at cost, fair value or using the equity method
b. By recognizing its share in the assets, liabilities, income and expenses of the joint venture and adding
them line by line to similar accounts
c. By using T-Account
d. As an investment measured using the equity method
7. When there are no separate books maintained for a joint operation, the joint operation’s transactions
may be summarized in a management account called “Joint Operation”. Unsold inventory is placed in
which side of the Joint Operation T-Account?
a.
b.
c.
d.
Debit side
Credit side
A or B
Not placed
8. On settlement, Brown Co., a joint operator, had a credit balance in its Joint Operation Account,
representing only its own transactions with the joint operation as well as those it has made on behalf of
the joint operation. Which of the following statements is most likely to be correct?
a.
b.
c.
d.
The joint operation has earned profit
The joint operation has incurred loss
Brown Co. may need to make cash payments to the other joint operators
Brown Co. will receive cash from the other joint operators
9. For financial reporting, a joint operator accounts for its interest in a joint operation by
a. Recognizing it as an investment
b. Applying the equity method
c. Recognizing its own assets, liabilities, income and expenses plus its share in assets, liabilities, income
and expenses of the joint operation
d. Measuring it at cost, at fair value or using the equity method.
10. An entity that acquires interest in a joint operation whose activity constitutes a business, shall account for
its share
a.
b.
c.
d.
Using the equity method
As a business combination
At fair value
At cost
PrE 7 ACCOUNTING FOR BUSINESS COMBINATIONS
ICI - CBEA
MULTIPLE CHOICE – PROBLEMS
1. Tech Co. and Robotics Co. are joint operators in the development of Super OS, a mobile phone operating
system. Each joint operator retains control over the assets contributed to the joint operation and share
equally in the profits and losses of the joint operation. During the year, Tech Co. earns revenue of
P1,000,000 from its own operations. Sales of Super OS amount to P400,000. How much total revenue shall
be reported in Tech Co’s statement of profit and loss for the year?
a.
b.
c.
d.
P1,000,000
P1,200,000
P1,400,000
P900,000
Use the following information for the next two questions:
A, B and C formed a joint operation for the sale of assorted fruits during the Christmas season. Their
transactions during the two-month period are summarized below:
The joint arrangement provided for the division of gains and losses among A, B, and C in the ratio of 2:3:5. The
joint operation is to close on December 31, 2020.
2. What is the joint operation profit?
a.
b.
c.
d.
(P6,600)
P6,600
P6,060
(P6,060)
3. What is the amount of cash that A will receive on the final settlement?
a.
b.
c.
d.
P9,280
P9,712
P8,500
P1,212
Use the following information for the next two questions:
Easy, Average and Difficult formed a joint operation. The following were their contributions: Easy, P100;
Average, P120; and Difficult, P80. On completion of the joint operation, the joint operators’ books show the
following balances:
The contractual arrangement stipulates that Difficult, the appointed manager, is entitled to a salary of P6
and a bonus of 15% of profit after the salary and bonus. Any balance of profit or loss is shared equally.
PrE 7 ACCOUNTING FOR BUSINESS COMBINATIONS
ICI - CBEA
4. How much were the sales of the joint operation?
a.
b.
c.
d.
P840
P880
P900
P960
5. How much was Difficult’s net share in the cash settlement?
a.
b.
c.
d.
P180
P200
P220
P320
6. A and B formed a joint operation. The following were the transactions during the year:
The joint operation was completed at the end of the year. Each joint operator is entitled to a 10%
commission on its purchases and a 20% commission on its sales. Any remaining profit or loss is divided
equally. Which of the following statements is correct?
a.
b.
c.
d.
In the settlement, A will pay B cash of P92
In the settlement, B will pay A cash of P92
In the settlement, A will pay B cash of P88
In the settlement, B will pay A cash of P102
7. A, B, and C formed a joint operation. Each will share equally in profits and losses. A, the appointed
manager, had the following account balances on the completion date of the joint operation:
A agreed to be charged for the cost of the unsold inventory. A’s share in the profit was P4. How much is
the cost of the unsold inventory?
a.
b.
c.
d.
P7
P9
P12
P17
8. A, B, and C formed a joint operation. At year-end, A’s books show the following balances:
PrE 7 ACCOUNTING FOR BUSINESS COMBINATIONS
ICI - CBEA
The cost of unsold inventory is P18. The joint operation’s profit is P11. What is the balance of the Joint
Operation account before distribution of profit?
a.
b.
c.
d.
P7 debit
P7 credit
P29 debit
P29 credit
9. A, B, and C formed a joint operation. At year end, the books of B and C show the following balances:
A, the appointed manager, is entitled to a bonus of 10% of profit before bonus. Any remaining profit or
loss is divided equally. In the settlement, A was charged P22 for the unsold inventory. In the settlement,
a.
b.
c.
d.
B receives P20, P12 from A and P8 from C
A pays C P10 and C pays B P8
A pays B P8 and C pays B P10
B receives P18
10. A, B and C’s joint operation has ended. The account balances are as follows:
In the cash settlement,
a.
b.
c.
d.
A receives P6.5, P2.5 from C and P4 from B
C receives P6.5, P2.5 from A and P4 from B
B pays A P4, and C pays B P6.5
C receives nothing