Ac8dccd2 1613019594275
Ac8dccd2 1613019594275
Ac8dccd2 1613019594275
Suppose that on the date of formation of a joint venture, instead of contribution of cash, a venture contributes
non-monetary assets and receives an interest in the joint venture and that the assets contributed have a fair value
that is greater than their carrying amount in the records of venture. Would it be appropriate for the venture to
record a gain from investing these non-monetary assets in the joint venture? If so, how much, and when should
it be recognized?
The requirements set out in PFRS 11 regarding this matter are as follows:
1. The investment should be recorded at the fair value of the non-monetary assets transferred to the joint
venture.
2. Only the gain represented by interest of the other nonrelated venturers should be recognized on the date of
contribution and only if the transaction has commercial substance as per PAS 16. This principle was applied
in on a transfer of an asset to a joint operation. If the transaction does not have commercial substance, then
the entire gain is considered to be unrealized. It shall be accounted for in the manner as the venturer’s share
of the gain.
3. The portion of the gain represented by the venturer’s own interest should be unrealized until the asset has
been sold to unrelated outsiders by the joint venture. Alternatively, the unrealized gain can be recognized
over the life of the asset if the asset is being used to generate a positive gross profit for the joint venture. In
effect, the product or service being sold by the joint venture to an outsider is allowing the venture to recognize
a portion of the unrealized gain. It is similar to selling a portion of the asset to outsiders. The unrealized
gains are contra accounts to the investment in the joint venture account. They will be offset in the investment
account on the balance sheet.
4. If a loss results from the recording of the investment, the portion of the loss represented by the interest of
the other unrelated venturers is recognized immediately into income. When it is evident that the asset
contributed to the joint venture is impaired, the entire loss is immediately recognized.
5. When the venture transfer assets to the joint venture and receives assets in addition to an interest in the
joint venture, the assets received can be considered the proceeds from the partial sale of the assets to the
other unrelated venturers, provided that the assets came from the investment of the other venturers or from
the other venturers’ share of joint venture borrowings.
SPECIAL ISSUES
PROBLEM A (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.
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.
3.
J Co.’s journal entry to record the initial investment on January 1, 20x4, is as follows:
Investment in JK Company…………………………………………….. 420,000
Equipment………………………………………………………………….. 120,000 Note:
Gain on sale of equipment…………………………………..(300,000 x60%) 180,000 J Co.
Unrealized gain – contra account…………………………(300,000 x40%) 120,000
recognizes a gain of P10,000, which is the portion of the gain deemed sold to outsiders.
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.
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
Investment in JK Company…………………………………………….. 342,000
Equipment………………………………………………………………….. 120,000
Gain on transfer of equipment to JK Company……………….. 55,715
Unrealized gain – contra account…………………………………….. 244,285
4. P24,428
The December 31, 20x4, entries are as follows:
Investment in JK Company…………………………………………….. 48,960
Investment income from JK Company (40% x P122,400)…….. 48,960
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
Investment in JK Company…………………………………………….. 330,000
Equipment………………………………………………………………….. 120,000
Gain on transfer of equipment to JK Company……………….. 60,857
Unrealized gain – contra account…………………………………….. 239,143
Note: The realized gain is based on the portion of the equipment deemed to be sold to the other venturers.
1. It is characterized by a contractual arrangement whereby two or more parties have joint control of the
arrangement.
A. Joint arrangement
B. Joint operation
C. Joint venture
D. Jointly controlled asset
2. It is the contractually agreed sharing of control of an arrangement which exists only when decisions about
relevant activities require unanimous consent of the parties sharing control.
A. Control
B. Significant influence
C. Joint control
D. Solidary control
3. It is a type of joint arrangement whereby the parties that have joint control of the arrangement have right to
the total assets and obligations for the total liabilities relating to the arrangement.
A. Joint venture
B. Jointly controlled assets
C. Joint operation
D. Joint business
4. It is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to
the net assets of the arrangement.
A. Joint venture
B. Jointly controlled asset
C. Joint operation
D. Joint business
5. What is the classification of the joint arrangement when the arrangement is structured without a separate vehicle
such as when the rights of each party to the total assets and obligations for total liabilities relating to the
arrangement are clearly established?
A. It shall be classified as joint venture
B. It shall be classified as joint operation
C. Neither joint venture nor joint operation
D. It can be either a joint operation or joint venture depending on the company policy of the parties to the
joint arrangement.
6. What is the classification of the joint arrangement when the assets and liabilities relating to the arrangement
are held by a separate vehicle or when the arrangement is established with a separate vehicle?
A. It shall be classified as joint venture.
B. It shall be classified as joint operation.
C. Neither joint venture nor joint operation.
D. It can be either a joint operation or joint venture depending on the legal form of the separate vehicle, terms
of the contractual arrangement or other relevant facts and circumstances.
7. Under PFRS 11, how shall the joint venturer account for its Investment in Joint Venture?
A. Equity method
B. Cost method
C. Fair value method under IFRS 9
D. Proportionate consolidation
8. Under PFRS 11, as an exception to the general rule of mandatory equity method accounting for Investment in
Joint Venture, what is alternative treatment available to joint venture for an investment in joint venture held or
is held indirectly through an entity that is a venture capital organization, mutual trust fund, unit trust and similar
entities including insurance-liked fund?
A. It may elect to measure the investment in joint venture at fair value through profit or loss
B. It may elect to measure the investment in joint venture at fair value through other comprehensive income
C. It may elect to measure the investment in joint venture at cost method
D. It may elect to measure the investment in joint venture at proportionate consolidation
9. Under PFRS for SMEs, how shall the joint venture account for its Investment in Joint Venture?
A. Equity method
B. Cost method
C. Fair value through profit or loss method under PFRS 9
D. Any of the above
10. Under PFRS 11, how shall the joint operator account for its interest in a joint operation?
A. The joint operator shall account for its interest under Equity Method
B. The joint operator shall account for its interest under Cost Method
C. The joint operator shall account for its interest using proportionate consolidation
D. The joint operator shall account for its interest by recognizing its assets, its liabilities, its revenue, its
expenses and its shar in the jointly controlled assets, jointly incurred liabilities, jointly eared revenue and
jointly incurred expenses in accordance with the contractual arrangement.