Exam 9: Accounting for Associates and Joint Ventures: the Equity Method

A 50% joint venturer acquires a further 10% interest in a jointly controlled operation,paying $2,000,000 to the jointly controlled operation whose assets including cash $1,000,000 have a fair value of $4,000,000.The acquisition will have the following effect on the venturer's cash position:

Discuss the principles applying to the calculation of a gain on the sale of a portion of a jointly controlled operation.

At the reporting date,June 30 20X7,the effect of the adjustments to record the interest of Midstream Ltd in the joint venture would be:

The one line method of accounting for interests in jointly controlled entities is appropriate because:

The line by line method of accounting for joint venture categories of jointly controlled operations and jointly controlled assets is the same as the proportionate consolidation method of accounting for jointly controlled entities

Midstream Ltd and Delta Ltd enter into a business undertaking in which they each commit 50-hectare vineyards.There is a contractual agreement between the two companies whereby they share control and must agree on all strategic financial and operating decisions relating to the two vineyards.The two companies appoint Todman Management Pty Ltd as the manager of the vineyard undertaking.A separate set of accounting database is established for the undertaking and each investor contributes additional cash capital to the undertaking and hold assets other than the vineyards as tenants in common.The intention of the investing companies is to take their proportionate share of the produce from the two vineyards to use in their own wineries.The business undertaking is:

Jointly controlled operations and jointly controlled assets result from an unincorporated contractual association

The one line method of reporting jointly controlled operations and jointly controlled assets:

What is meant by the statement that a venturer will account for an interest in a jointly controlled operation or jointly controlled asset by 'converting from the one line method to the line by line method'?

The line by line method of accounting for interests in jointly controlled entities is recommended by AASB131 because:

Where a venturer is a subsidiary company the equity method would be applied to an investment in a jointly controlled entity:

On September 30 20X7,Auction Ltd acquired a 10% interest in an oil exploration joint venture operation,Deepwell Enterprises from Creeker Ltd at a cost of $3,000,000.At June 30 20X7,exploration had not yet reached the stage where an accurate evaluation of the area of interest could be made and each venturer had capitalised the expenditures incurred to that date in their own financial statements.For the year ended June 30 20X8,the financial statements of the UJV disclosed: a.Net assets at July 1 20X7 $9,000,000 - sundry assets $10,000,000 less sundry liabilities $1,000,000.Up to that stage $25,000,000 had been spent on exploration. B.Exploration expenditure to September 30 20X7 $4,000,000. C.Net assets at September 30 20X7 $5,000,000 - sundry assets $6,000,000 less sundry liabilities $1,000,000. D.Exploration expenditure October 1 20X7 to June 30 20X8 $20,000,000. E.Cash contributions from venturers in the period October 1 20X7 to June 30 20X8 (in proportion to percentage interest held)$26,000,000. F.Net assets at June 30 20X8 $11,000,000 - sundry assets of $13,000,000 less sundry liabilities of $2,000,000.Deferred exploration expenditure to June 30 20X8 $49,000,000. At the date of acquisition,September 30 19X7,which of the following journal entries would be used by Auction Ltd to record the cost of acquiring the investment in Deepwell Enterprises?

The journal entry to record the initial investment of Delta Ltd would be:

What factors are relevant to the choice of accounting methods for venturers in jointly controlled entities?

Midstream Ltd and Delta Ltd enter into a business undertaking to lease a 100-hectare vineyard from Pinot Ltd.There is a contractual agreement between the two companies whereby they share control and must agree on all strategic financial and operating decisions.The two companies appoint Todman Management Pty Ltd as the vineyard manager.A separate set of accounting database is established for the undertaking and each investor contributes cash capital to the undertaking and holds the assets as tenants in common.Each of the investing companies enters into a separate agreement with the vineyard manager to sell the produce of the vineyard in the market on their behalf.The business undertaking is:

On July 1 20X4,Gold Ltd formed a joint venture entity with Maggs Ltd,Research Pty Ltd,to research for ultimate sale in the hamburger market the Giant Genetic Spud (GGS)and the Square Tomato (SR).There was a contractual agreement under which each company shared control of the venture.Each company contributed $500,000 in share capital on that date; and,during the first year of operations,each contributed a further $2,000,000 through loans.For the year ended June 30 20X5,the following financial statements were produced for the joint venture entity (amounts in thousands): Balance Sheet as at June 30 20X5 Statement of Research and Development Activity for the Year ended June 30 20X5 At June 30 20X5,Gold Ltd was uncertain as to the outcome of Project GT; but felt reasonable certain that Project GGS would develop into an economically viable patent right in the following year. At June 30 20X5,the net investment of Gold Ltd in the joint venture entity calculated using the equity method was:

For a joint venture to be recognised under AASB131 there must be a contractual arrangement

The main advantage of the one line method of disclosing interests in jointly controlled operations and jointly controlled assets is disclosure of these interests.

Midstream Ltd and Delta Ltd enter into a business undertaking to lease a 100-hectare vineyard from Pinot Ltd.There is a contractual agreement between the two companies whereby they share control and must agree on all strategic financial and operating decisions.The two companies appoint Todman Management Pty Ltd as the vineyard manager.A separate set of accounting database is established for the undertaking and each investor contributes cash capital to the undertaking.The intention of the investing companies is to market the produce of the vineyard and make a profit.The business undertaking is:

The line by line method of accounting is required for interests in joint ventures which are: