Part 2 Joint Arrangements Class Consultation PDF

Joint Arrangements – Part 2
Continuation on Problem VI:
AA
Merchandise contribution 12,000

Construction supplies 120,000
Total 252,000
Add: Share in Net income 112,200
Total 364,200
Less: Office supplies 3,600
Inventory taken 3,000 (6,600)_
Balance 357,600
Less: Sales (Cash on Hand) (204,000)
Cash settlement (to be received) 153,600
BB
Add: Share in Net Income 135,000
Total 195,000
Less: Office supplies (3,600)
Total 191,400
Cash settlement (to be paid) (120,600)
CC
Payment of Permits 6,000
Payment of supplies 10,800
Add: Share in Net Income 31,800
Total 48,600
Less: Office supplies 3,600
Stand 6,000 (9,600)
Total 39,000
Cash Settlement (to be paid) (33,000)
VII - Joint Venturer (Investor) is Not a Parent and

Does Not Prepare Consolidated Financial Statements – Equity Method
Two real estate companies set up a separate vehicle for the purpose of acquiring and operating
condominium units. One of the companies, SS Company paid P2,016,000 for a 30% interest in AA
Corporation’s (a separate vehicle) outstanding voting stock on January 1, 20x4. Such acquisition gave
SS Corporation to joint control with another company over AA Corporation. The book values and fair
values of AA’s assets and liabilities on January 1, along with amortization data, are as follows:
AA Co. AA Co.
Book value Fair value
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 480,000 P 480,000
Accounts receivable – net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 840,000 840,000
Inventories (sold in 20x4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200,000 1,440,000
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000 240,000
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
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P7,080,000 P8,040,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 960,000 P 960,000
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000 240,000
Bonds payable (due January 1, 20x9) . . . . . . . . . . . . . . . . . . . . . . . 1,200,000 1,320,000
Common stock, p10 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,080,000
Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . P7,080,000
AA Corporation reported net income of P1,440,000 for 20x4 and paid dividends of P720,000.
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Required:
1. Prepare the schedule of determination and allocation of excess
2. Prepare entries in the books of the joint venturer in 20x4 in relation to its investment in joint venture,
assuming that the joint venture does not prepare consolidated financial statements using equity
method
3. In relation to No. 2, determine:
a. Investment in Joint Venture-SS Company and
b. Investment income (equity in net earnings) for 20x4.
Answer - Problem VII (Equity Method)

1.
Schedule of Determination and Allocation of Excess
Date of Acquisition – January 1, 20x4
Cost of investment
Consideration transferred P2,016,000
Less: Book value of stockholders’ equity of Son:
Common stock (P3,600,000 x 30%) P 1,080,000
Retained earnings (P1,080,000 x 30%) 324,000 1,404,000
Allocated excess (excess of cost over book value) P 612,000
Less: Over/under valuation of assets and liabilities:
Increase in inventory (P240,000 x 30%) P 72,000
Increase in land (P960,000 x 30%) 288,000
Increase in building (P600,000 x 30%) 180,000
Decrease in equipment (P840,000 x 30%) ( 252,000)
Increase in bonds payable (P120,000 x 30%) ( 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. (Over) Under
Book value Fair value Valuation
Inventories (sold in 20x4) P1,200,000 P1,440,000 P 240,000
Land 1,080,000 2,040,000 960,000
Buildings – net ( 10 year remaining life) 1,800,000 2,400,000 600,000
Equipment – net ( 7 year remaining life) 1,440,000 600,000 ( 840,000)
Bonds payable (due January 1, 20x9) ( 1,200,000) (1,320,000) ( 120,000)
Net P4,320,000 P5,160,000 P 840,000
A summary or depreciation and amortization adjustments is as follows:

Over/ 30% Current
Account Adjustments to be amortized Under thereof Life Year(20x4)
Inventories (sold in 20x4) P 240,000 P 72,000 1 P 72,000
Land 960,000 288,000 - -
Buildings – net ( 10 year remaining life) 600,000 180,000 10 18,000
Equipment – net ( 7 year remaining life) ( 840,000) ( 252,000) 7 (36,000)
Bonds payable (due January 1, 20x9) ( 120,000) ( 36,000) 5 ( 7,200)
Net P 840,000 P 252,000 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 216,000
Investment in AA Company (P720,000 x 30%) 216,000
Record dividends from AA Company.
December 31, 20x4:

(3) Investment in AA Company 432,000
Investment income (P1,440,000 x 30%) 432,000
Record share in net income of AA Company.
December 31, 20x4:
(4) Investment income 46,800
Investment in AA Company……………………. 46,800
Record amortization of allocated excess of inventory,
equipment, buildings and bonds payable.
3. Thus, the investment balance and investment income in the books of SS Company (the Joint Venturer)
are as follows:
a. P2,185,200
Investment in Joint Venture (AA Company)
Cost, 1/1/x4 2,016,000 216,000 Dividends – Son (720,000x 80%)
NI of AA 46,800 Amortization
(1,440,000 x 30%) 432,000
Balance, 12/31/x4 2,185,200
b. P385,200
Investment Income
Amortization 46,800 NI of AA
432,000 (P1,440,000 x 30%)
385,200 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 P3,600,000
Retained earnings
Retained earnings,1/1/20x4 P 1,080,000
Net income – 20x4 1,440,000
Dividends – 20x4 ( 720,000) 1,800,000
Book value of stockholders’ equity of AA Company,12/31/20x4 P5,400,000
Multiplied by: Interest in Joint Venture 30%
Book value of Interest in Joint Venture P1,620,000
Add: Unamortized allocated excess – 30% thereof
P252,000 – P46,800, amortization) 205,200
Goodwill 360,000
Investment in Joint Venture (AA Company) – equity method P2,185,200
IX - Special Issues: Contributions of Non-Monetary Assets to the Joint Venture
J Co. and K Inc. formed JK Company on January 1, 20x4. J Co. invested equipment with a carrying
amount of P120,000 and a fair value of P420,000 for a 40% interest in JK Company., while B Inc.
contributed equipment, which was similar to the equipment contributed by J Co., with a total fair value
of P630,000, for a 60% interest in JK Company.
The equipment has an estimated useful life of 10 years. On December 31, 20x4, JK Company reported a
net income of P122,400. Assume that the transaction does not have commercial substance in this
situation because J Co. owned a similar portion of the same type of equipment both before and after
the contribution to the joint venture.
Required: Using Equity method

1. Determine the book value of the Investment in Joint Venture on December 31, 20x4
2. Determine the unrealized gain on transfer to JK Company (the separate vehicle) on January 1,
20x4.
3. Prepare entries in the books of the joint venturer in 20x4 in relation to its investment in JK
Company.
4. Determine the realized gain through depreciation on transfer of equipment to JK Company on
December 31, 20x4.
5. Determine the gain on transfer of equipment to be presented in the 20x4 income statement.
Answer - Problem IX
1. P468,960. Refer to No. 3 as a guideline, review the entries: P420,000+P48,960 = P468,960.

2.
Fair value of equipment transferred to JK Company…………………………………. P 420,000
Carrying amount of equipment on J Company’s books………………………………… __120,000
Unrealized gain on transfer to JK Company……………………………………………. P 300,000
3. A Company’s journal entry to record the initial investment on January 1, 20x4 is as follows:
Investment in JK Company…………………………………………….. 420,000
Equipment………………………………………………………………….. 120,000
Unrealized gain – contra account…………………………………….. 300,000
Using the equity method of accounting, J Co. will record its 40% share of the yearly net incomes or
losses reported by JK Company.; in addition, it will recognize the unrealized gains in income over the
life of the equipment.
The December 31, 20x4, entries are as follows:

Investment income from JK Company (40% x P122,400)…….. This method 48,960
of
Unrealized gain – contra account (P300,000/10)………………………. 30,000 recognizing
Gain on transfer of equipment to JK Company……………….. 30,000
the gain
from investing will be repeated over the next nine years, unless JK Company sells this equipment
before that period expires. If it does, J Co. will immediately take the balance in the unrealized gains
account into income.
4. P30,000 – refer to No. 3 for computation
5. P30,000 – refer to No. 3 for computation
X - Special Issues: Contributions of Non-Monetary Assets to the Joint Venture
The facts from this example are identical in all respects to those from Problem IX, except that K Co.
contributes technology (rather than equipment) with a fair value of P630,000. Assume that the
transaction does have commercial substance in this situation because J Co. owned equipment before
its contribution to the joint venture but indirectly owned a portion of equipment and technology after
the contribution.
2. Determine the unrealized gain and realized gain on transfer to JK Company (the separate
vehicle) on January 1, 20x4.
3. Prepare entries in the books of the joint venturer in 20x4 in relation to its investment in JK
Company.
4. Determine the realized gain in income statement on transfer of equipment to JK Company on
December 31, 20x4.
Answer - Problem X
1. P468,960. Refer to No. 3 as a guideline, review the entries: P420,000+P48,960 = P468,960.

2. Unrealized gain, P120,000 – refer to No. 2 for computation
Realized gain, P180,000 – refer to No. 2 for computation
3.
J Co.’s journal entry to record the initial investment on January 1, 20x4, is as follows:
Equipment………………………………………………………………….. 120,000
Gain on sale of equipment…………………………………………….. 180,000
Note: J Co. recognizes a gain of P180,000, which is the portion of the gain deemed sold to outsiders.
Investment income from JK Company (40% x P122,300)…….. 48,960
Unrealized gain – contra account (P120,000/10)………………………. 12,000

Note: J portion of the unrealized gain is taken into income each year.
This method of recognizing the gain from investing will be repeated over the next nine years, unless
JK Company sells this equipment before that period expires. If it does, J Co. will immediately take the
balance in the unrealized gains account into income.
4. P192,000 = P180,000 + P12,000 (refer to No. 2 for computation)
XI - Special Issues: Contributions of Non-Monetary Assets to the Joint Venture
The facts from this problem are identical in all respects to those from Problem IX, except that J Co.
receives a 40% interest in JK Company, plus P78,000 in cash in return for investing equipment with a fair
value of P420,000, while K Inc. contributed equipment with a fair value of P435,000 plus cash of P78,000,
for a total contribution of P513,000.
2. Determine the immediate gain from selling equipment to K Inc. on January 1, 20x4.
20x4.
December 31, 20x4.
5. Determine the gain on transfer of equipment to be presented in the 20x4 income statement,
Answer - Problem XI
1. P390,960. Refer to Nos. 3 and 4 as a guideline, review the entries: P342,000+P48,960 = P390,960.
2.
Sales proceeds……………………………………………………………………………………. P 78,000
Carrying amount of equipment on sold (P78,000/P420,000 x P120,000)…………….. __ 22,285
Immediate gain from selling equipment to K Inc.…………………………………………. P 55,715
Note: J gain is recognized for the portion (P78,000/P420,000) of the equipment deemed to be sold.
3. P244,285
A Company’s January 1, 20x4, journal entry to record the investment of equipment and the receipt of
cash would be as follows:
Cash……………………………………………………………………………... 78,000
Equipment………………………………………………………………….. 120,000
4. P24,428
Investment income from JK Company (40% x P122,400)…….. Assuming 48,960
on
Unrealized gain – contra account (P244,285/10)………………………. 24,428 December
Gain on transfer of equipment to JK Company………………... 24,428 31 year-
end, the
P80,143 (P55,715 + P24,428) gain on transfer of equipment to JK Company will appear in J Co’s 20x4
income statement. The unamortized balance of the J’s share of the unrealized gain of P219,857
(P244,285 – P24,428) will be offset against the investment account.
5. P80,143 = P55,715 (refer to No. 2) + P24,428 (refer to No. 4)
XII - Special Issues: Contributions of Non-Monetary Assets to the Joint Venture
In this illustration assuming the increase in the amount of cash that J Co. received when it invested
equipment for a 40% interest in JK Company. Assume the cash received was P90,000 instead of the
P78,000 that was used in Problem XI. Because K Inc. invested only P78,000 cash in the joint venture, the
additional P12,000 was borrowed by JK Company.
2. Determine the sales proceeds and the return of equity to J Company.
3. Determine the immediate gain from selling equipment to K Inc. on January 1, 20x4.
20x4.
December 31, 20x4.
6. Determine the gain on transfer of equipment to be presented in the 20x4 income statement,
Answer - Problem XII

1. P378,960. Refer to Nos. 4 and 5 as a guideline, review the entries: P330,000+P48,960 = P378,960.
2.
The allocation of the cash between sale proceeds and return of equity is made as follows:
Sales proceeds:
From K Inc.’s investment in JK Company……………………………. P 78,000
From borrowings of JK Company……………………………………... P 12,000
KInc.’s proportion……………………………………………………………. __ 60% __ 7,200
P 85,200
Return of equity to J Company:
From K Inc.’s investment in JK Company……………………………. P 12,000
J Company’s proportion of JK borrowings…………………………. __ 40% ___4,800
Total cash received……………………………………………………………. P 90,000
Note: When some of the cash received by J Co. comes from joint venture borrowings, only K Co.s share of the cash
borrowed is considered proceeds from the sale of equipment.
3. P60,857
The gain from selling is computed as follows:
Sales proceeds……………………………………………………………………………………. P 85,200
Carrying amount of assets sold (P85,200/P420,000) x P120,000………………………..... __24,343
Immediate gain from selling equipment to K Inc.………………………………………….. P 60,857
4. P239,143
J Company’s January 1, 20x4, journal entry would be as follows:
Cash……………………………………………………………………………... 90,000
Equipment………………………………………………………………….. 120,000
Note: The realized gain is based on the portion of the equipment deemed to be sold to the other venturers.
5. P23,914
Investment income from JK Company (40% x P122,400)…….. 48,960
Unrealized gain – contra account (P239,143/10)……………………. 23,914

6. P84,771 = P60,857 (refer to No. 3) + P23,914 (refer to No. 5)
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Joint Arrangements – Part 2

Continuation on Problem VI:

Merchandise contribution 12,000

VII - Joint Venturer (Investor) is Not a Parent and

Answer - Problem VII (Equity Method)

The over/under valuation of assets and liabilities are summarized as follows:

A summary or depreciation and amortization adjustments is as follows:

January 1, 20x4 – December 31, 20x4:

December 31, 20x4:

To check the balance of Investment in Joint Venture (AA Company):

IX - Special Issues: Contributions of Non-Monetary Assets to the Joint Venture

Required: Using Equity method

1. P468,960. Refer to No. 3 as a guideline, review the entries: P420,000+P48,960 = P468,960.

Investment in JK Company…………………………………………….. 48,960

X - Special Issues: Contributions of Non-Monetary Assets to the Joint Venture

1. P468,960. Refer to No. 3 as a guideline, review the entries: P420,000+P48,960 = P468,960.

Unrealized gain – contra account (P120,000/10)………………………. 12,000

XI - Special Issues: Contributions of Non-Monetary Assets to the Joint Venture

5. P80,143 = P55,715 (refer to No. 2) + P24,428 (refer to No. 4)

Answer - Problem XII

Unrealized gain – contra account (P239,143/10)……………………. 23,914

6. P84,771 = P60,857 (refer to No. 3) + P23,914 (refer to No. 5)

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