Accounting for Joint Arrangements
Use the following information for questions 1 and 2:
McKee and Nelson enter into a contract to speculate on the stock market, each using approximately P5,000 of
personal cash. The earnings are to be divided equally, and settlement is to be made at the end of the year after
all securities have been sold. A summary of the monthly brokerage statements for the year follows:
MacKee
Nelson
Total of all purchase confirmations
P45,000
P18,000
Total of all sales confirmations
48,700
16,800
Interest charged on margin accounts
80
50
Dividends credited to accounts
40
100
1.
The joint operation profit (loss) is:
Investment in Joint Ventures
Purchases (45K+15K) 45 000
65 500
(48 700+16 800) Sales
Interest (80+50)
130
140
(40+100) Dividends
63 130
65 640
2 510 net income
2.
Final settlement will require payments as follows:
✓
McKee pays Nelson P2,405.
Mckee Capital:
Total Sales 48 700
Purchases (45 000)
Interest
40
Dividends
50
Net income
1 225
Payment
2 405
Nelson Capital:
16 800
18 000
50
100
1 225
Receipt
2 405
Use the following information for questions 3 and 4:
Bar and Car join in a operation for the sale of football souvenirs at the Rose Bowl game. Partners agree to the
following: (1) Bar shall be allowed a commission of 20% on net purchases made by him, (2) each member shall
be allowed a commission of 25% on his own sales, (3) any remaining profit shall be shared equally. Operation
transactions follow:
Bar
Car
Cash purchases
₱950
-
Expenses paid
-
₱150
Sales (each keeps his receipts)
800
600
3.
The joint operation profit (loss) is:
Sale (600+800)
Purchased
Expenses
Net Income
4.
In the final settlement, the amount due to (from) operators:
✓
Bar, P420; Car, P(420)
Bar
190
200
(120)
270
950
(800)
420
5.
1 400
(950)
(150)
300
Car
150
(120)
30
150
(600)
420
Total
190
350
(240)
300
Reyes, Silva and Tan formed a joint operation. Reyes was designated as the manager and was to record the
joint operation’s transactions in his own books. As manager, Reyes was to be allowed a salary of P12,000;
the remaining profit or loss was to be divided equally. The following balances appeared at the end of 20x4,
before adjustment for operation inventory and profit:
Joint operation cash
₱48,000
₱-
Joint operation
-
15,000
Silva, capital
1,000
-
Tan, capital
-
27,000
The venture was terminated on December 31, 20x4 and unsold merchandise costing P10,500 were taken over by
Tan. Reyes made cash settlement with Silva and Tan. In the final cash settlement, how much did Tan
receive?
Unadj.
Unsold
15 000
10 500
Tan Capital 27 000
4 500 *13 500/3
Salaries
Net income
(12 000)
13 500
Receive
31 000
(10 500)
21 500
Use the following information for questions 6 to 8:
R Inc., S Co., and T Inc. sign an agreement to collectively purchase an oil depot and to hire a company to
manage and operate the depot on their behalf. The costs involved in running the pipeline and the revenue earned
from the oil depot are shared by the three parties based on their ownership percentage. All major operating and
financing decisions related to the oil depot must be agreed to by the three companies. The cost of purchasing the
oil depot was P84,000,000. The oil depot has an estimated 20-year useful life with no residual value. The
management fee for operating the oil depot for 20x4 was P16,800,000. Revenue earned from the oil depot in
20x4 was P27,720,000. R invested P25,200,000 for a 30% interest.
6.
Compute the share of R Inc. in the revenue of the joint operation for 20x4:
Revenue (27 720 000 x 30%)
7.
Compute the share of R Inc. in the expenses of the joint operation for 20x4:
Operating expenses (16 800 000 x 30%)
Amortization (25 200 000 x 20yrs)
Total Expenses
8.
8 316 000
5 040 000
1 260 000
6 300 000
Compute the share of R Inc. in the net income of the joint operation for 20x4:
Revenue
Operating
Amortization (84M / 20yrs)
Total
Net Income
27 720 000
16 800 000
4 200 000
6 720 000
x
30%
2 016 000
Accounting for Joint Arrangements
1.
A joint arrangement has three parties in which A owns 50% voting rights, while B owns 30% and C
owns 20% voting rights in the arrangement. The terms of the contract among the parties A, B and C
state that at minimum 75% of the voting rights are needed to exercise the control over the
arrangement. This joint arrangement is:
✓
2.
An arrangement is established by two parties and each party owns 50% voting rights of the
arrangement and the terms of the contract require that at minimum 51% voting rights are needed to
exercise the control over the arrangement.
✓
3.
Joint Operation
For the purposes of equity accounting for an investment in an associate, it is presumed that the
investor has significant influence over the other entity where the investor holds:
✓
7.
Joint Venture
A and B decide to enter into a joint arrangement to produce a new product. A undertakes one
manufacturing process and B undertakes the other. A and B have agreed that decisions regarding the
joint operation will be made unanimously and that each will bear their own expenses and take an
agreed share of the sales revenue from the product.
✓
6.
No Joint Control
Two parties established a joint arrangement in the form of an incorporated separate legal entity. Each
party to the arrangement owns 50% voting rights of the incorporated entity. The incorporation results
in the separation of the joint owners from this entity and this reflects that the assets and liabilities held
in the jointly control entity are the assets and liabilities of the incorporated entity. In such a case, the
parties to the entity have the right to the net assets of the entity; therefore, it will be treated as: a.
✓
5.
Joint Control
A joint arrangement is established by three parties in which A owns 50% voting rights while B and C
each own 25% voting rights of that arrangement. The terms of the contract among A, B and C state
that a minimum of 75% voting rights are needed to exercise the control over the arrangement. This
joint arrangement is:
✓
4.
Joint Operation
20% or more of the voting power of the investee
The following are regarded as factors indicating the existence of significant influence over another
entity:
✓
YES - representation on the board of directors
✓
YES - participation in decisions about dividends
✓
YES - interchange of managerial personnel
✓
8.
For the purposes of equity accounting, significant influence is regarded as the power of an investor to:
✓
9.
12.
14.
20% or more of the voting power of the investee
When disclosing information about investments in associates, PAS 28 Investments in Associates and
Joint Ventures, requires separate disclosure of which of the following?
✓
Shares in associates, in the statement of financial position
✓
Share of profit or loss of associates, in the statement of profit or loss and other
comprehensive income.
✓
Share of any discontinuing operations, in the statement of changes in equity.
✓
Shares of changes recognized directly in the associate's equity, in the statement of changes
in equity.
When eliminating any unrealized profit arising when a joint operator provides services to a joint
operation the profit is eliminated against:
✓
13.
Joint arrangements classified as joint ventures are accounted for under PAS 28.
For the purposes of equity accounting for an investment in an associate, it is presumed that the
investor has significant influence over the other entity where the investor holds:
✓
11.
participate in the financial and operating policy decisions of an investee
Which of the following statements is correct? a.
✓
10.
NO - ability to control the investee's operating policies
work in progress, finished goods and other inventory related accounts;
Bosch Co. received a cash dividend from a common stock investment. Should Bosch report an
increase in the investment account if it accounts for the investment under the fair value method or the
equity method?
✓ Fair value method, NO; Equity method, NO
PFRS requires joint ventures to be reported as:
✓ equity method investments.
Problem Solving
15-19. Using the same information in the preceding problem, instead of contributing cash for a
30% interest in the oil depot, R contributed metal sheet to be used by the company constructing
the oil depot. R had manufactured the metal sheet at a cost of P18,480,000. All parties to the
contract agreed that the fair value of these metal sheets was P25,200,000 and the fair value of the
oil depot once it was completed was P84,000,000. The other operators have a 70% interest in the
joint operation.
15. Determine the realized gain upon the contribution of the metal sheets:
FV Metal
Cost
Realized gain
25 200 000
(18 480 000)
6 720 000 x 70% = 4 704 000
16. Determine the unrealized gain upon the contribution of the metal sheets:
Unrealized gain
6 720 000 x 30% = 2 016 000
17. Determine the amortization expense for the year 20x4:
25 200 000 / 20 = 1 260 000 - 100 800 = 1 159 200
18. Determine the oil depot's net cost at the end of 20x4:
25 200 000 - 2 016 000 + 100 800 = 23 284 800
19. Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to
account for the investment in joint venture. During 20x4, Dew reported income of P250,000
and paid dividends of P80,000. There is no amortization associated with the investment.
During 20x4, how much income should Yaro recognize related to this investment?
Income
Common stock
Recognized
250 000
x. 30%
75 000
20. On January 1, 20x4, Pacer Company paid P1,920,000 for 60,000 shares of Lennon Co.'s
voting common stock which represents a 45% investment in joint venture. No allocation to
goodwill or other speci c account was made. Joint control over Lennon was achieved by this
acquisition. Lennon distributed a dividend of P2.50 per share during 20x4 and reported net
income of P670,000. What was the balance in the Investment in Lennon Co. account
found in the nancial records of Pacer as of December 31, 20x4?
fi
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Payment
Dividend (60 000 x 2.50)
Net Income
Balance 12/31/20x4
1 920 000
(150 000)
301 500
2 071 500
21. During January 20x7, Wells, Inc. acquired 30% of the outstanding common stock of Wilton
Co. for P1,400,000. This investment gave Wells the ability to exercise joint control over
Wilton. Wilton's assets on that date were recorded at P6,400,000 with liabilities of
P3,000,000. Any excess of cost over book value of Wells' investment was attributed to
unrecorded patents having a remaining useful life of ten years. In 20x7, Wilton reported net
income of P600,000. For 20x8, Wilton reported net income of P750,000. Dividends of
P200,000 were paid in each of these two years. What was the reported balance of Wells'
Investment in Wilson Co. on December 31, 20x8?
Purchase
net income 20x7 (600K x 30%)
net income 20x8 (750K x 30%)
dividends (200k x 2yrs x 30%)
Depreciation (38K x 2)
1 400 000
180 000
225 000
(120 000)
(76 000)
Balance of Wells
1 609 000
Assets
Liab.
Total
Total
6 400 000
(3 000 000)
3 400 000
x
30%
1 020 000
1 400 000 - 1 020 000 = 380 000 / 10 = 38 000
22. On January 1, 20x8, Bangle Company purchased 30% of the voting common stock of Sleat
Corp. for P1,000,000 with joint control over Sleat. Any excess of cost over book value was
assigned to goodwill, During 20x8, Sleat paid dividends of P24,000 and reported a net loss of
P140,000. What is the balance in the investment account on December 31, 20x8?
Purchase
Dividends (24 000 x 30%)
Net loss
( 140 000 x 30%)
Balance 12/31/20x8
1 000 000
(7 200)
(42 000)
950 800
23. Tower Inc. owns 30% joint control of Yale Co. and applies the equity method. During the
current year, Tower bought inventory costing P66,000 and then sold it to Yale for P120,000.
At year-end, only P24,000 of merchandise was still being held by Yale. What amount of intercompany inventory pro t must be deferred by Tower?
fi
Selling price
Inventory
Total
120 000
(66 000)
54 000 / 120 000 = 45% x 24 000 = 10 800 x 30% = 3 240
Long Term Construction
1.
Receipt of cash by the seller at the time of sale is not required for the recognition of revenue.
2.
In accounting, the term "revenue recognition" refers to measuring the expense related to the revenue for a
specific period.
3.
Generally, expenses incurred to generate revenues should be matched to the revenues recognized in a
given period.
4.
The percentage-of-completion (overtime) method of accounting for long-term construction projects is
supported on the basis that it is more conservative than the cost recovery method (point in time) method.
5.
The percentage of completion (overtime) method of accounting for long-term construction-type contracts
is preferable when estimates of costs to complete and extent of progress toward completion are reasonably
dependable.
6.
"Billings on contracts" is a contra account to "Accounts Receivable."
7.
The percentage-of-completion (overtime) and completed contract methods will produce different periodic
income amounts, but the Accounts Receivable balances will be equal.
8.
The percentage-of-completion (overtime) method for long-term construction contracts can be used if at
least the ultimate collection of the contract price is reasonably certain.
9.
Revenues must always be recognized at a single point in time.
10.
Under the percentage-of-completion (overtime) method of accounting for long-term construction
contracts, revenue is recognized only when the construction is completed.
11.
Under the percentage-of-completion (overtime) method of accounting for long-term construction
contracts, revenue is recognized as construction progresses (usually on the basis of costs incurred) to
attain a matching of revenues and expenses.
12.
Under the cost recovery method (point in time) method, all construction costs are accumulated in an
inventory account.
13.
The cost recovery method (point in time) method.of revenue recognition recognizes revenue on a longterm project as work progresses so that timely information is provided.
14.
Payment on account of progress billings, when using the percentage of completion (overtime) method of
recognizing revenue are debited to cash and credited to progress billings.
15.
Payment on account of progress billings, when using the cost recovery (point in time) method of
recognizing revenue are debited to cash and credited to progress billings.
16.
If it becomes apparent that a long term project will result in a loss, the full amount of the loss must be
accounted for in the year it is first estimable.
17.
Most construction companies cannot afford to wait until the completion of the contract to collect their
billings.
18.
When using cost recovery method (point in time) method of recognizing revenue, the billings to the
customer are debited to cash and credited to progress billings.
19.
If it becomes apparent that a long term project will result in a loss, the full amount of the loss must be
accounted for in the year it is first estimable.
20.
Most construction companies cannot afford to wait until the completion of the contract to collect their
billings.
21.
When using cost recovery method (point in time) method.of recognizing revenue, the billings to the
customer are debited to cash and credited to progress billings.
22.
When recognizing revenue over time on a long-term contract, amounts billed and the cash actually
received affect income recognition.
23.
When recognizing revenue over time on a long-term contract, the percent complete is often estimated by
comparing the cost incurred to date with the total estimated cost to complete.
24.
Firms have free choice as to whether to recognize revenue over time or at a point in time to account for a
long-term contract.
25.
When revenue is recognized over time versus upon completion of the contract, different amounts of total
profit or loss are recognized for a particular contract.
26.
Estimated losses on long-term contracts are recognized as ratable over the contract term regardless of
whether revenue is recognized over time or upon contract completion.
27.
When a long-term contract does not qualify for revenue recognition over time, all gross profit and loss
recognition occurs when the contract is completed.
28.
Under IFRS, firms have free choice as to whether they use the percentage-of-completion method or the
cost recovery (point in time) method to account for a long-term construction contract.
29.
For long-term construction contracts, the cost recovery (point in time) method under IFRS requires
recognizing equal amounts of revenue and cost until all costs are recovered.
30.
When the cost recovery (point in time) method is used to account for a long-term construction contract
under IFRS, an equal amount of cost and revenue is typically recognized during the early life of the
contract, such that high initial gross profit is recognized in net income.
Multiple Choice:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Which of the following is not a difference between the percentage-of- completion and cost recovery (point
in time) methods of accounting for long-term construction contracts?
✓ They cause a different cash inflow during the construction period.
The percentage-of-completion (over time) method of accounting for long-term construction projects is
supported on the basis that it:
✓ Produces a realistic matching of expenses with revenues.
Choose the correct statement concerning the percentage of completion (over time) method of accounting
for a firm with only one current long-term construction contract in process (assume no loss is projected):
✓ The net current asset account (net of construction in process, and billings) exceeds that
same account under the completed contract method
During the period of construction, financial information related to a long-term contract, which is being
accounted for using, the cost recovery (point in time) method will:
✓ Appear only on the balance sheet during the period of construction.
Why is construction in progress increased by the annual recognized profit on long-term construction
contracts?
✓ Because the project's value is increased above cost
Choose the correct description of the net balance of costs in excess of billings on long-term contracts.
Assume only one current contract, and that contract price does not equal total estimated contract cost at
the end of the current year.
✓ Under percentage of completion, the balance equals cost to date less billings, less total
projected loss
The principle disadvantage of using the percentage-of completion method of recognizing revenue from
long-term construction contracts is that
✓ Gives results based upon estimates, which may be subject to considerable uncertainty.
The percentage-of-completion and completed contract methods of accounting for long-term construction
contracts will produce:
✓ Equal balances each period in the Billings On Contracts account
Under the cost recovery method (point in time) of income recognition on long-term construction contracts:
✓ The accumulated amount in the "Construction In Process" account is essentially the
amount of cost of goods sold at completion date
Under the percentage-of-completion method of income recognition on long-term construction contracts:
✓ Income is accumulated in the "Construction In Process" inventory account.
Problem Solving
I.
On July 1, 2016, ABC Construction contracted to build an of ce building for XYZ Inc. for a
total contract price of P 975,000.
1.
2016
2017
2018
Contract cost incurred to date
75,000
600,000
1,050,000
Estimated costs to complete the contract
675,000
400,000
-
Billings to XYZ, Inc.
150,000
550,000
275,000
Under the percentage of completion method, how much is the Construction-inProgress at December 31, 2017?
Contract cost incurred
Est. cost to complete
Total estimated cost
75 000 / 750 000 x (975 000 - 750 000) = 22 500
675 000
750 000
2016
Cost
75 000
Gross Pro t
22 500
2017
Cost (600 000 -75 0000)
525 000
Contract Price
975 000
Cost (600 000 + 400 000)
(1 000 000)
(25 000)
Construction in Progress 12/31/2017
22 500
(47 000)
575 500
Alternative:
600 000
(25 000)- (1 000 000 - 975 000)
575 000
Under the zero-pro t method, how much is the Construction-in-Progress, net of
Progress Billings at December 31, 2017?
150 000
550 000
700 000
(575 000)
fi
fi
2016 Billings
2017 Billings
Total Billings
CIP 2017
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2.
CIP, net PB
3.
125 000
Under the percentage of completion method, how much is the realized gross pro t/
(loss) at December 31, 2018?
Contract Price
Cost
II.
975 000
(1 050 000)
(75 000)
-25 000
(50 000)
On January 1, 2016, Brave Construction began constructing a P 2,100,000 contract. The
entity used the percentage of
completion method. For the year ended December 31, 2017, Brave Construction billed its
client an additional 55% of the contract price.
2016
2017
2018
Construction in progress
441,000
?
?
Estimated cost to complete
?
?
-
Costs incurred
425,250
969,000
675,750
Excess of construction in progress over billings
(84,000)
(330,750)
Note: POC is used cost & pro t are of the same % when computed and added to CIP.
4.
How much is the estimated cost to complete in 2016?
441 000 / 2 100 000 = 21%
425 250 / 21% = 2 025 000 - 425 250= 1 599 750
5.
How much is the realized gross pro t or (loss) in 2017?
CIP - Progress Billings = Excess of CIP over Billings
2016
CIP
Progress Billings(?)
Gross Loss 2017
1 349 250
(1 680 000) 2 100 000 x 80%
(330 750) work back
CIP 20x7
1 349 250
fi
2017
CIP (?)
Progress Billings
Excess Of CIP over billings
fi
How much is the balance of construction in progress in 2017?
fi
6.
441 000
work back- (525 000) / 2 100 000 = 25% + 55% + = 80%
(84 000)
Cost incurred 2016
2017
20x6 Pro t
III.
( 425 250)
( 969 000)
( 15 750)
( 60 750)
VALEDICTION Construction Co. entered into a R80M xed price contract for the
construction of a private road for FAREWELL SPEECH, Inc. The performance obligation on
the contract is satis ed over time. VALEDICTION measures its progress on the contract
using the "cost-to-cost" method. The estimated total contract cost is 40M. The following were
the actual costs incurred by VALEDICTION during the rst year of the construction:
Costs of negotiating the contract (charged immediately as expense)
Costs of materials used in construction
12,000,000
Costs of materials purchased but not yet used in construction
2,000,000
Site labor costs
4,000,000
Site supervision costs
800,000
Depreciation of equipment used in construction
480,000
Depreciation of idle construction equipment
240,000
Costs of moving plant, equipment and materials to and from the contract site
160,000
Costs of hiring plant and equipment
560,000
Advance payments to subcontractors (subcontracted work is not yet started
80,000
TOTAL COST
7.
400,000
18 000 000 / 40 000 000 = 45%
How much revenue is recognized as of the end of the rst year?
Contract price
80 000 000
Percentage of Completion
x 45%
Revenue -1st yr
36 000 000
On September 1, 20x1, ABC Co. enters into a contract with a customer to remodel a plant's
electrical wirings and install a new generator for a total consideration of 12M. The
remodeling and the installation are treated as a single performance obligation satis ed over
time. The expected contract costs are as follows:
Generator
4,000,000
Other costs
5.000.000
Expected total contract costs
9,000,000
fi
fi
fi
fi
fi
Additional information:
•
ABC Co. uses the cost-to-cost method in measuring its progress towards the complete
satisfaction of the performance obligation.
•
ABC Co. incurs total costs of P6,000,000 in 20x1, including the cost of the generator.
•
The customer obtains control of the generator when it is delivered to the site in December
20x1. However, the generator will not be installed until March 20x2.
fi
IV.
•
ABC Co. regards the cost of the generator as signi cant in relation to the expected total
contract costs (i.e., 4M ÷ 9M = 44.44%).
Although ABC Co. acted as a principal in procuring the generator, ABC Co. is not involved
in designing or manufacturing the generator.
•
8.
How much revenue is recognized in 20x1?
Cost incurred
6 000 000
Generator
(4 000 000)
Adj. Cost incurred 2 000 000
Expected cost
(9M - 4M)
/ 5 000 000
40%
Contract Price
Generator
Revenue
Revenue 20x1
How much pro t is recognized from the contract in 20x1?
Revenue
Cost
Pro t
fi
Cost
5 000 000
x
40%
2 000 000
4 000 000
6 000 000
fi
Cost
POC
fi
9.
12 000 000
(4 000 000)
8 000 000
x
40%
3 200 000
4 000 000
7 200 000
7 200 000
(6 000 000)
1 200 000