University of San Jose – Recoletos

School of Business and Management

Accountancy and Finance Department
Accounting for Business Combinations
Mr. Jun Brian Alenton
CPA, CMA, CAT, RCA, MICB, MBA

Module 2: JOINT ARRANGEMENTS

Problem 1. JOINT OPERATIONS

On January 1, 2021, FIT CORPORATION and RIGHT, INC. establish a joint arrangement to
manufacture a product. Each company has a 50% interest in the activity and will share on
total output equally.

FIT’s initial contribution consisted of P5,000,000 cash and RIGHT’ contributed machinery
that was carried in its books at P4,750,000. The fair value of the machinery at that date
was P5,000,000. During the first year of operation both parties contributed a further
P7,500,000 each.

On December 31, 2021, the manager of the joint operations provided the following statements:

Costs incurred for the year ended December 31, 2021; the Joint operation uses actual costing
in its manufacturing operations.

Wages P4,600,000
Supplies 7,000,000
Overheads 5,500,000
Depreciation 1,400,000
P18,500,000
Cost of FG inventory 13,500,000
Work-in-Process, 12/31/21 P 5,000,000

Receipts and Payments for year ended December 31, 2021:

Receipts:
Original contributions P 5,000,000
Additional contributions 15,000,000
Total P 20,000,000

Payments:
Machinery (1/2/21) P 2,000,000
Wages 4,500,000
Supplies 7,500,000
Overheads 5,250,000
Operating expenses 500,000 19,750,000
Closing cash balance P 250,000

Assets and liabilities at December 31, 2021

Assets:
Cash P 250,000
Machinery P7,000,000
Accum Depreciation 1,400,000 5,600,000
Supplies 1,000,000
Work-in-process 5,000,000
Total assets P 11,850,000

Liabilities:
Accrued wages P 100,000
Accounts payable 750,000
Total liabilities P 850,000

Net assets P 11,000,000

Required:
1. Prepare the journal entries in the records of FIT CORPORATION and RIGHT, INC. in relation
to the joint operation.

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ACCTG303 ACCTG303 – 202102 Page 2 of 8
Problem 2 – JOINT VENTURE
On January 1, 2021, GWAPO CORPORATION signed a joint venture agreement with another venturer,
GWAPA, INC. for the production of CDs. BEAUTISOME COMPANY, is established to carry on the
business venture, with each venturer contributing P1,250,000 for equal shares in the
company’s 250,000 P10.00 par value shares. They will share profits equally.

On December 31, 2021, the financials of BEAUTISOME COMPANY follows:

COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
Revenues P500,000
Expenses 385,000
Net income P 115,000
Retained earnings, Jan 1, 2021
Cash dividend paid (38,400)
Retained earnings, Dec 31, 2021 P 76,600

BALANCE SHEET
Cash P51,600 Liabilities P725,000
Accounts receivable 400,000 Share capital 2,500,000
Inventory 625,000 Retained earnings 76,600
Plant, Property, Equipt. 2,350,000
Accum Depreciation ( 125,000) ________
Total P3,301,600 Total P 3,301,600

The financial statements of GWAPO CORPORATION, one of the venturers, for the same period
follow:

Revenues P10,800,000
Expenses 9,280,000
Profit 1,520,000
Share capital 3,000,000
Retained Earnings 920,000
Liabilities 840,000
Totals P6,280,000

Cash P 529,200
Accounts receivable 480,000
Inventory 840,000
Plant, Property, and Equipment 3,900,000
Accumulated Depreciation (700,000)
Investment in Joint Venture 1,230,800
Totals P6,280,000
Required:
1. Prepare journal entries in the books of GWAPO CORPORATION using the Equity Method.
2. Prepare the financial statements for 2021 for GWAPO CORPORATION.

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Problem. 3: JOINT VENTURE – THE VENTURER IS AN SME.
1. On January 1, 2021 SME J acquired 25% of the equity of L CORPORATION for P128,000. SME
J shares in the joint control over the relevant activities of the joint venture in
relation to its operations. Transaction costs of 2% of the purchase price of the shares
were incurred by SME J.
2. On December 15, 2021 L CORPORATION declared and paid cash dividends of P18,000. .
3. For the year ended December 31, 2021, L CORPORATION recognized a profit of P60,000.
4. Published price quotations do no exist for the shares of L CORPORATION. Using appropriate
valuation techniques SME J determined the fair value of its investments in L CORPORATION
at December 31, 2021 as P140,000. Costs to sell are estimated at 5% of the fair value
of the investment. SME J does not prepare consolidated financial statements because it
does not have any subsidiary (ies).

Required:
Prepare appropriate journal entries in the books of SME J for the L CORPORATION under each
of the three (3) methods

Transactions Cost Model Fair value Model Equity Model

Original investment Inv. in JV X Investment in JV x Inv. in JV X

Cash X Cash x Cash X
Transaction cost Inv. in JV X Profit and Loss X Inv. in JV X
Cash x Cash X Cash X
Cash dividends Cash X Cash X Cash X
P/L X P/L X Inv in JV X
Year-end adjustment
FV remeasurement Inv. in JV X
P/L X
Share of net income Inv. in JV X
P/L X
Share of impairment P/L x P/L X
Inv in JV X Inv in JV X

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 Multiple Choices:
K and L join in a venture for the sale of certain merchandise. The participants agree the following:
K shall be allowed a commission of 10% on his net purchase; the participants shall be allowed
commissions of 25% on their respective sales; and K and L shall divide the profit or loss 60% and
40%, respectively. Joint operation transaction follows:
Dec. 1: K make cash purchase of P57,000.
3: L pays venture expenses of P9,000.
5: Sales are as follows: K, P48,000; L, P36,000. The participants keep their own cash receipts.
7: K return unsold merchandise and receives P15,000 cash.
15: The participants make cash settlement.

1. In the distribution of the net profit of the venture, the shares of K, and L are:
K L K L
a. P4,260 P3,230 c. P4,820 P3,430
b. P4,680 P3,120 d. P4,840 P4,230

2. In the final cash settlement, L would pay K the amount of:

a. P14,100 b. P14,880 c. P15,100 d. P15,890

__________________________ Joint_Operation_______________________________
2021 2021
Nov. 6 Merchandise-Peter P8,500 Nov. 20 Cash Sales-Rolan P20,400
8 Merchandise-Neil 7,000 12 Cash Sales-Rolan 4,200
10 Freight paid-Rolan 200 28 Merchandise-Neil 1,210
12 Advertising-Rolan 150
Dec. 8 Purchase-Rolan 3,500
14 Selling Expenses-Rolan 400

The venture agreement provided for the division of gains and losses among Peter, Neil and
Rolan in the ratio of 2:3:5 The venture was to close as of December 31, 2021.
3. The total gain from the joint operation amounted to:
a. P6,060 b. P12,120 c. P18,180 d. None
4. As final settlement, Peter received in cash:
a. P6,060 b. P7,608 c. P8,080 d. 9,712

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Soriente, Santos, and Salazar formed a joint arrangement, Soriente has been designated as
manager of the venture, for which he is to receive a bonus of 15% of the profit after
deduction of the bonus as an expense. The net profit, after bonus, has been agreed to be
divided as follows; Soriente, 25%; Santos, 40%; and Salazar, 35%
After 5 months, the joint arrangement is terminated as of May 31, 2021. On this date, the
trial balance kept by Soriente contains the following balances:
Debit Credit
Joint Operation P9,000
Santos P500
Salazar P2,000
The venture has still some undisposed merchandise, which Soriente agreed to purchase at its
cost of P2,500. The bonus of Soriente has not yet been taken up.

5. The net profit of the joint arrangement, after bonus to Soriente is:
a. P1,500 b. P9,000 c. P10,000 d. P11,500
6. The share of Santos in the venture is:
a. P3,500 b. P3,600 c. P4,000 d. P4,600
7. The cash settlement received by Santos and Salazar is:
a. Santos –P4,000; Salazar –P3,500
b. Santos –P3,500; Salazar – P3,500
c. santos –P 4,000; Salazar –P6,500
d. Santos – P3,500; Salazar –P 5,500

On January 1, 2021, PATRIMONY Co. entered into a joint agreement classified as a joint
venture. For an investment of P2,000,000, PATRI Co. obtained 30% interest in HERITAGE Joint
Venture, Inc. During the year HERITAGE Joint Ventures, Inc. reported profit of P4,000,000
and other comprehensive income of P800,000, for a total comprehensive income of P4,800,000.
HERITAGE Joint Venture, Inc. declared dividends of P2,400,000 during the year.
8. How much is the carrying amount of the investment in venture on December 31, 2021?
a. P2,720,000 b. P2,000,000 c. P2,480,000 d. P4,160,000

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JRU CORPORATION, a joint venturer with a 50% equity in Joint Venture ABC INCORPORATED,
prepared the following draft of its combined financial statements at December 31, 2021
before the year-end adjustments under the equity method.
Revenues P10,800,000
Expenses 9,280,000
Profit 1,520,000
Ordinary shares 3,000,000
Retained earnings 920,000
Liabilities 840,000
Totals P6,280,000

Current assets P1,830,000

Plant assets 3,900,000
Accumulated Deprn (700,000)
Investment in JV 1,250,000
Totals P6,280,000
Joint venture ABC reported a net profit of P115,000 for the year ended December 31, 2021.

9. Determine the total assets that will be shown in the balance sheet of JRU CORPORATION
at December 31, 2021.
a. P5,030,000 c. P6,280,000
b. P6,337,500 d. P5,280,000

10. Determine the total stockholders’ equity that will be shown in the balance sheet of
JRU at December 31, 2021.
a. P4,190,000 c. P5,497,500
b. P5,440,000 d. P4,440,000

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Items 11 thru 14 are based on the following information:
• On January 1, 2021 SME JV acquired a 35% equity of Z CORPORATION for P37,000, SME JV
shares in the joint control over the strategic financial and operating decisions of Z
CORPORATION.. Transactions costs of 5% of the purchase price of the shares were incurred
by SME JV.
• On December 31, 2021 Z CORPORATION declared and paid a dividend of P24,000. Z CORPORATION
recognized a profit of P18,000 for that year.
• Published price quotations do not exist for the shares of Z CORPORATION. Using appropriate
valuation techniques SME JV determined the fair value of its investment in Z CORPORATION
at December 31, 2021 as P49,000. Costs to sell are estimated at 9% of the fair value of
the investments. SME A does not prepare consolidated financial statements because it
does not have any subsidiary.

11. What is the profit (loss) of SME JV to be presented in the income statement for Z
CORPORATION using the fair value method?
a. PP20,400 c. P15,990
b. P18,550 d. P14,140
12. What is the profit (loss) of SME JV to be presented in the income statement for Z
CORPORATION using the cost model?
a. P(8,575) c. P 5,250
b. P 8,400 d. P (1,750)
13. What is the investment balance of SME JV at the end of the year in Z CORPORATION using
the fair value model?
a. P 52,325 c. P49,000
b. P 57,575 d. P 47,075
14. What is the investment balance of SME JV at the end of the year in Z CORPORATION using
the equity model?
a. P38,850 c. P 34,125
b. P42,525 d. P 36,750

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