Joint Arrangements Ans

ARTS-PRTC

JOINT ARRANGEMENTS

PFRS 11 AFAR

MICHAEL B. BONGALONTA,CPA,MICB,MBA

Joint operation profit and Cash settlement

Use the following information for the next two questions: The following are the transactions of a joint operation formed by A, B and C during a year:  A contributed cash of ₱400 and merchandise costing ₱800.  B contributed merchandise costing ₱1,600. Freight-in paid by B is ₱80.  C made purchases amounting to ₱400 using the cash contributed by A.  C paid expenses of ₱800 using its own cash.  C made total sales of ₱3,200. All the merchandise was sold except one-half of those contributed by B.  C is appointed as the manager of the joint operation. As compensation, C is entitled to a ₱120 salary plus bonus of 25% on profit after salary and bonus.  Interest of 10% per annum is allowed to A and B’s capital contributions.  C is charged for the cost of any unsold inventory. Profit or loss after necessary adjustments shall be divided equally. 1.

How much is the profit or loss after salaries but before bonus of the joint operation? a. 192 b. 240 c. 360 d. 420

2.

On the cash settlement between the joint operators, a. A pays ₱1,288 c. C receives ₱96 b. B pays ₱1,816 d. All of these

ANSWER:

1. B Solutions: Profit or loss is computed as follows: Joint operation Merchandise – A 800 Purchases - A's cash 400 Merchandise – B 1600 Freight - in – B 80 Expenses – C 800

Salaries expense - C

120

3200   840    

Sales – C

360

Profit before salary and bonus - Credit balance

  240

Bonus expense**

48

  192

Unsold inventory charged to C*

Profit after salary but before bonus - Credit balance Profit after salary and bonus

*Unsold inventory: (₱1,600 plus ₱80 freight-in) multiplied by one-half. 2. C Solution: Profit is allocated to the joint operators as follows: Allocation to: Profit before salary and bonus Salary to C Bonus to C** Profit after salary and bonus Interest on capital: A - (300 x 10%) B - (420 x 10%) Profit after interests on capital Allocation (24 ÷ 3) Net share - as allocated

A

B

C 120 48

120

(32) 88

168 (32) 136

(32) 136

Totals 360 (120) (48) 192 (120) (168) (96) 96 -

**Bonus is computed as follows: P B = P 1 + Br B = 240 – (240 ÷ 1.25%) = 48 Cash settlement is determined as follows: Joint operation - A 400 Inventory contributed by A   800 Cash contribution   88 Net share in profit   1,288 Cash settlement – receipt  

Inventory contributed Freight paid Net share in profit Cash settlement – receipt

Joint operation - B 1,600   80   136   1,816  

Joint operation – C Expenses paid Net share in profit Cash settlement - receipt

800 136 96

840

Cost of inventory taken

Joint operation profit and Cash settlement between joint operators

Use the following information for the next two questions: A and B formed a joint operation. The following were the transactions during the year:   A B Total purchases 400 320 Total sales 480 240 Expenses paid 800 Other income 40 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. 3.

How much is the profit (loss) of the joint operation? a. 760 b. (760) c. 840

4.

On the cash settlement between the joint operators, a. A pays B ₱368 c. A pays B ₱428 b. B pays A ₱368 d. B pays A ₱428

d. (840)

ANSWER:

3. B Solution: Requirement (a): Profit or loss Purchases – A Purchases – B Expenses – A Loss - debit balance 4. B Solution: The loss is allocated as follows: Allocation to: A Loss during the year 20% commission on purchases: (10% x 400) – A 40

Joint operation 400 320 800 760  

B

480 240 40

Totals (760) (40)

  Sales - A Sales - B Other income - B

(10% x 320) – B 25% commission on sales: (20% x 480) – A (20% x 240) – B Loss to be allocated equally Allocation: (976 ÷ 2) Net share - as allocated

32 96 (488) (352)

48 (488) (408)

(32) (96) (48) (976) 976 -

Cash settlement is determined as follows: Joint operation - A Purchases 400 480 Expenses 800 352 368 Cash settlement - receipt Purchases

Joint operation - B 320 408   240   40 368

Collections on sales Net share in loss

Net share in loss Collections on sales Collections on other income Cash settlement - payment

Reconstruction of T-account – Balance of joint operation account 5. A, B, and C formed a joint operation. The following were taken from the joint operation’s books:   Debit Credit JO – Cash 80 B, Capital 60 C, Capital 88 The cost of unsold inventory is ₱72. The joint operation’s profit is ₱44. How much is the balance of the joint operation account before distribution of profit? a. 28 b. 116 c. 56 d. 0 ANSWER:

5. A Solution: Debit balance (squeeze)

Joint operation 28   72   44

Unsold merchandise Profit - credit balance

Equity method - Downstream sale of inventory Use the following information for the next two questions: ABHOR Co. owns 20% in HATE Joint Venture, Inc. and uses the equity method to account for its interest in the joint venture. ABHOR has joint control over HATE Joint Venture, Inc. In 20x1, ABHOR sold inventory to HATE Joint Venture for ₱400,000 with a 60% gross profit on the transaction. The inventory remains unsold during 20x1 and was sold by HATE Joint Venture to external parties only in 20x2. ABHOR’s income tax rate is 30%. 6. How much is adjusted share in the profit of the joint venture in 20x1 if the joint venture reports profits of ₱4,000,000? a. 362,000 b. 560,000 c. 632,000 d. 752,000 7. How much is adjusted share in the profit of the joint venture in 20x2 if the joint venture reports profits of ₱4,800,000? a. 960,000 b.1,008,000 c. 1,128,000 d. 1,200,000 ANSWER:

6. C Solution: Profit of joint venture – 20x1 Multiply by: Ownership interest

4,000,000 20%

Share in profit of joint venture before adjustment Elimination of unrealized profit from downstream sale – net of tax (400,000 x 60% x 70%) Adjusted share in profit of joint venture – 20x1

800,000 (168,000) 632,000

7. C Solution: Profit of joint venture – 20x2 Multiply by: Ownership interest Share in profit of joint venture before adjustment Realized profit from downstream sale – net of tax (400,000 x 60% x 70%)

Adjusted share in profit of joint venture – 20x2

4,800,000 20% 960,000 168,000 1,128,000

Equity method - Upstream sale of inventory Use the following information for the next two questions: ADHERE Co. owns 20% of STICK Joint Venture, Inc. and uses the equity method to account for its interest in the joint venture. ADHERE has joint control over STICK Joint Venture, Inc. In 20x1, STICK Joint Venture, Inc. sells inventory to ADHERE for ₱400,000 with a 60% gross profit on the transaction. The inventory remains unsold during 20x1 and was sold by ADHERE to external parties only in 20x2. ADHERE’s income tax rate is 30%. 8.

How much is adjusted share in the profit of the joint venture in 20x1 if the joint venture reports profits of ₱4,000,000? a. 766,400 b. 752,000 c. 784,000 d. 796,000

9.

How much is adjusted share in the profit of the joint venture in 20x2 if the joint venture reports profits of ₱4,800,000? a. 984,400 b. 993,600 c. 997,500 d. 1,002,000

ANSWER:

8. A Solution: Profit of joint venture – 20x1 Multiply by: Ownership interest Share in profit of joint venture before adjustment Elimination of unrealized profit from upstream sale – net of tax (400,000 x 60% x 70% x 20%) Adjusted share in profit of joint venture – 20x1

4,000,000 20% 800,000 (33,600) 766,400

9. B Solution: Profit of joint venture – 20x2 Multiply by: Ownership interest Share in profit of joint venture before adjustment Realized profit from upstream sale – net of tax (400,000 x 60% x 70% x 20%)

Adjusted share in profit of joint venture – 20x2

4,800,000 20% 960,000 33,600 993,600

Equity method - Downstream sale of depreciable asset Use the following information for the next two questions: ANOMALOUS Co. owns 20% interest in IRREGULAR Joint Venture, Inc. and uses the equity method to account for its interest in the joint venture. ANOMALOUS has joint control over IRREGULAR Joint Venture, Inc. On January 1, 20x1, ANOMALOUS sold an equipment with a carrying amount of ₱400,000 and a remaining useful life of 10 years to IRREGULAR Joint Venture for ₱480,000. Gain of ₱80,000 was recorded by ANOMALOUS. Both ANOMALOUS and IRREGULAR Joint Venture use the straight line method of depreciation. 10. How much is adjusted share in the profit of the joint venture in 20x1 if the joint venture reports profits of ₱4,000,000? a. 728,000 b. 752,000 c. 784,000 d. 733,000

11. How much is adjusted share in the profit of the joint venture in 20x2 if the joint venture reports profits of ₱4,800,000? a. 976,400 b. 993,600 c. 968,000 d. 1,040,000 ANSWER:

10. A Solution: Profit of joint venture – 20x1 Multiply by: Ownership interest Share in profit of joint venture before adjustment Elimination of unrealized gain from downstream sale (80,000 x 9/10)

Adjusted share in profit of joint venture – 20x1

4,000,000 20% 800,000 (72,000) 728,000

11. C Solution: Profit of joint venture – 20x2 Multiply by: Ownership interest Share in profit of joint venture before adjustment Recognition of realized gain from downstream sale (80,000 ÷ 10 years)

Adjusted share in profit of joint venture – 20x2

4,800,000 20% 960,000 8,000 968,000

ANSWER:

c. 968,000 d. 1,040,000 Equity method - Upstream sale of depreciable asset

Use the following information for the next two questions: Use the same information in the preceding problem except that the sale is an upstream sale. 12. How much is adjusted share in the profit of the joint venture in 20x1 if the joint venture reports profits of ₱4,000,000? a. 723,600 b. 758,600 c. 785,600 d. 736,400 13. How much is adjusted share in the profit of the joint venture in 20x2 if the joint venture reports profits of ₱4,800,000? a. 976,400 b. 963,600 c. 961,600 d. 1,020,400 ANSWER:

12. C Solution: Profit of joint venture – 20x1 Multiply by: Ownership interest Share in profit of joint venture before adjustment Elimination of unrealized gain from upstream sale (80,000 x 9/10 x 20%)

Adjusted share in profit of joint venture – 20x1

4,000,000 20% 800,000 (14,400) 785,600

13. C Solution: Profit of joint venture – 20x2 Multiply by: Ownership interest Share in profit of joint venture before adjustment Recognition of realized gain from upstream sale (80,000 ÷ 10 years) x 20%

Adjusted share in profit of joint venture – 20x2 Equity method - Downstream sale of non-depreciable asset

4,800,000 20% 960,000 1,600 961,600

Use the following information for the next two questions: APLOMB Co. owns 20% interest of POISE Joint Venture, Inc. and uses the equity method to account for its interest in the joint venture. APLOMB has joint control over POISE Joint Venture, Inc. On January 1, 20x1, APLOMB sold land with a carrying amount of ₱400,000 to POISE Joint Venture for ₱480,000. Gain of ₱80,000 was recorded by APLOMB. 14. How much is adjusted share in the profit of the joint venture in 20x1 if the joint venture reports profits of ₱4,000,000? a. 720,000 b. 758,000 c. 784,000 d. 736,000 15. How much is adjusted share in the profit of the joint venture in 20x2 if the joint venture reports profits of ₱4,800,000? a. 976,000 b. 960,000 c. 962,000 d. 1,020,000 ANSWER:

14. A Solution: Profit of joint venture – 20x1 Multiply by: Ownership interest Share in profit of joint venture before adjustment Elimination of unrealized gain from downstream sale Adjusted share in profit of joint venture – 20x1

4,000,000 20% 800,000 (80,000) 720,000

15. B Solution: Profit of joint venture – 20x2 Multiply by: Ownership interest Share in profit of joint venture – 20x2

4,800,000 20% 960,000