Exam 8: Accounting for Joint Arrangements

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 databases 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 major difference between a joint venture and a joint operation is that in a joint venture,the venturers share in the output of the venture,while the joint operators share in the profits of the entity.

An investor in a joint operation is required to account for the investment in accordance with AASB 11.

The line-by-line method of accounting hides the existence of interests in jointly controlled operations and jointly controlled assets.

A 40% venturer in a jointly controlled operation sells an asset to the joint venture.The asset has a fair value of $5 000 000.The carrying amount in the books of the venture was $4 000 000.The profit to be recognised by the venturer is:

The one-line method of accounting for joint ventures is the same as the equity method of accounting for investments in associates.

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.

The line-by-line method of accounting,according to AASB 11,is required for interests in joint ventures that are:

Supplementary disclosure requirements for joint ventures in the financial statements of venturers include:

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

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 databases 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:

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 databases is established for the undertaking and each investor contributes cash capital to the undertaking and hold the assets as tenants in common.The intention of the investing companies is to take their proportionate share of the produce of the vineyard to use in their own wineries.The business undertaking is:

On 30 September 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 30 June 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 30 June 20X8,the financial statements of the UJV disclosed: a.Net assets at 1 July 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 30 September 20X7 $4 000 000. C.Net assets at 30 September 20X7 $5 000 000-sundry assets $6 000 000 less sundry liabilities $1 000 000. D.Exploration expenditure 1 October 20X7 to 30 June 20X8 $20 000 000. E.Cash contributions from venturers in the period 1 October 20X7 to 30 June 20X8 (in proportion to percentage interest held)$26 000 000. F.Net assets at 30 June 20X8 $11 000 000-sundry assets of $13 000 000 less sundry liabilities of $2 000 000.Deferred exploration expenditure to 30 June 20X8 $49 000 000. At the date of acquisition,30 September 19X7,which of the following journal entries would be used by Auction Ltd to record the cost of acquiring the investment in Deepwell Enterprises?

For a joint venture to be recognised under AASB 11,there must be a contractual arrangement.

The one-line method of accounting for joint operations is required by AASB 11.

Unrealised profits or losses on the transfer of assets to a jointly controlled operation are always offset against the joint venture investment account.

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

Discuss the issue of entitlement of venturers to share in profits of a jointly controlled entity.

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'?

On 1 July 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 30 June 20X5,the following financial statements were produced for the joint venture entity (amounts in thousands): Balance Sheet as at 30 June 20X5 Assets Cash \5 0 Supplies inventory 40 Equipment (net of accumulated depreciation \ 50 ) 450 Total assets \5 40 Less liabilities Loan payable \4 000 Accounts payable 50 4050 Net assets - \3 510 Venturers' equity \1 000 Share capital 4510 Accumulated losses -3510 Venturers' equity ---- Statement of Research and Development Activity for the Year ended 30 June 20X5 Expenditure-Project ST \2 100 Expenditure-Project GGS 2410 Total expenditure \4 510 At 30 June 20X5,Gold Ltd was uncertain as to the outcome of Project GT,but felt reasonably certain that Project GGS would develop into an economically viable patent right in the following year. At 30 June 20X5,the net investment of Gold Ltd in the joint venture entity calculated using the equity method was: