Deck 8: Accounting for Joint Arrangements

Question 1

According to AASB 11.24,a venturer must recognise its interest in a jointly controlled entity using:

A) proportionate consolidation.
B) The equity method.
C) either proportionate consolidation or the equity method.
D) one-line method.

Answer 1

B

Question 2

Accounting Standard AASB 11 Joint Arrangements does not apply to investments in joint ventures:

A) by venture capital organisations.
B) by unit trusts.
C) that are held for sale.
D) all of the above.

Answer 2

D

Question 3

Discuss the control test for asset recognition in relation to the line-by-line method of accounting for interests in jointly controlled operations and jointly controlled assets.

Answer 3

Truehe control test for asset recognition in the line-by-line method for jointly controlled operations and jointly controlled assets:
- Accounting regulations require that assets constitute future economic benefits controlled by the entity.In a joint venture,there is only partial control as opposed to control of all the future economic benefit.
- The line-by-line method also aggregates fully controlled assets with jointly controlled assets in the venturer's financial statements.The effect is to complexly hide the existence of jointly controlled operations and jointly controlled assets in the venturer's financial statements.

Question 4

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:

A) a joint venture operation because the investors have agreed to a sharing of control and to a sharing of the outputs of the vineyard.
B) a joint venture entity because the undertaking has been established as a separate entity in which there is a simple sharing of control.
C) a simple partnership in which two companies operate as partners in a business undertaking.
D) none of the above.

Question 5

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

Question 6

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

Question 7

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

Question 8

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
$\begin{array}{lll}\text {Assets }&\\\text { Cash}&\$50\\\text {Supplies inventory }&40\\\text {Equipment (net of accumulated depreciation \( \$ 50 \) ) }&450\\\text {Total assets }&\$540\\\text { Less liabilities}&\\\text {Loan payable}&\$4000\\\text {Accounts payable }&50\\&4050\\\text { Net assets} &-\$3510\\\text {Venturers' equity }&\$1000\\\text {Share capital}&4510\\\text { Accumulated losses}&-3510\\\text {Venturers' equity }&----\\\end{array}$
Statement of Research and Development Activity for the Year ended 30 June 20X5
$\begin{array}{lll}\text { Expenditure-Project ST}&\$2100\\\text {Expenditure-Project GGS }&2410\\\text { Total expenditure}&\$4510\\\end{array}$
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:

A) $500 000.
B) $2 500 000.
C) $2 000 000.
D) none of the above.

Question 9

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

Question 10

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

Question 11

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

A) jointly controlled entities.
B) jointly controlled operations.
C) jointly controlled assets.
D) both B and C.

Question 12

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 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:

A) a joint venture operation because the investors have agreed to a sharing of control and to a sharing of the outputs of the vineyard.
B) a joint venture entity because the undertaking has been established as a separate entity in which there is a simple sharing of control.
C) a simple partnership in which two companies operate as partners in a business undertaking with the intention of making a profit.
D) none of the above.

Question 13

In a venture in which there are jointly controlled assets,the venturers share the assets as tenants in common; which means that:

A) each venturer has a proportionate interest in each joint controlled asset.
B) each venturer has a distinct but unidentifiable share of each jointly controlled asset.
C) each venturer has a distinct and identifiable share of each jointly controlled asset.
D) none of the above.

Question 14

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:

A) a joint venture operation because the investors have agreed to a sharing of control and to a sharing of the produce of the vineyard.
B) a joint venture entity because the undertaking has been established as a separate entity in which there is a simple sharing of control.
C) a simple partnership in which two companies operate as partners in a business undertaking.
D) none of the above.

Question 15

A jointly controlled entity can be:

A) a company.
B) a partnership.
C) a trust.
D) all of the above.

Question 16

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

Question 17

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:

A) a joint venture operation because the investors have agreed to a sharing of control.
B) a joint venture entity because it has been established to operate the vineyard with the intention of making a profit.
C) a simple partnership in which two companies operate as partners in a business undertaking.
D) none of the above.

Question 18

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

A) in the joint venture entity financial statements.
B) in the subsidiary's financial statements.
C) in the consolidated financial statements.
D) none of the above.

Question 19

The essential element that would distinguish a business undertaking as a partnership and NOT a joint venture operation would be:

A) the business undertaking makes a profit in the year.
B) there is no joint control agreement so that the undertaking is neither a joint venture entity nor a joint venture operation.
C) the business activity is an undertaking formed by the investors with the intention of making a profit.
D) none of the above.

Question 20

The concept of joint control:

A) includes unilateral control.
B) includes significant influence.
C) excludes unilateral control and significant influence.
D) none of the above.

Question 21

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:

A) $5 000 000.
B) $4 000 000.
C) $1 000 000.
D) $600 000.

Question 22

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:

A) reduced by $2 000 000.
B) reduced by $700 000.
C) reduced by $1 000 000.
D) none of the above.

Question 23

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

A) venturers have joint control.
B) venturers have control.
C) venturers have significant influence.
D) none of the above.

Question 24

In July 20X6,Midstream Ltd entered into a joint venture operation with Delta Ltd to explore for minerals in the area of interest KP97.Midstream Ltd contributed $5 000 000 in cash and Delta Ltd contributed specialised drilling equipment with an agreed fair value of $5 000 000.The venturers shared control of the operation.All the assets of the operation were held by the venturers as tenants in common.The estimated useful life of the plant was five years.In the accounts of Delta Ltd,this equipment was carried at cost $6 000 000 less accumulated depreciation $3 000 000.For the year ended 30 June 20X7,the following financial statements were prepared by the joint venture manager (amounts in thousands): Balance Sheet as at 30 June 20X7
$\begin{array}{lr}\text { Assets }\text { Cash } & \$ 2000 \\\text { Equipment (net of accumulated depreciation } \$ 1000 \text { ) } & 4000\\\text { Total assets } & \$ 6000 \\\text { Less liabilities } & 1000\\\text { Venture capital }&\$5000\end{array}$ Performance Statement for the Year ended 30 June 20X7
Interest revenue $\quad$$\quad$$\quad$$\quad$$\quad$ $300
Exploration expenditure $\quad$$\quad$ 5300 At 30 June 20X7,the exploration had not yet advanced to the stage where a reliable estimate could be made of the recoverable mineral reserves in KP97.
At the reporting date,30 June 20X7,the effect of the adjustments to record the interest of Midstream Ltd in the joint venture would be:

A) Debit Deferred Exploration Expenditure $2 650 000, Credit Interest Revenue $150 000, Credit Investment in Joint Venture $2 500 000.
B) Debit Deferred Exploration Expenditure $2 650 000, Debit Cash $1 000 000, Debit Plant and Equipment $2 500 000, Credit Accumulated Depreciation-Plant $500 000, Credit Sundry Liabilities $500 000, Credit Interest Revenue $150 000 and Credit Investment in Joint Venture $5 000 000.
C) Debit Exploration Expense $2 650 000, Credit Interest Revenue $150 000 and credit Investment in Joint Venture $2 500 000.
D) None of the above.

Question 25

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

Question 26

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

Question 27

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?

A)Dr Sundry Assets $600 000,Dr Deferred Exploration Expenditure $2 500 000,Cr Sundry Liabilities $100 000 Cr Cash $3 000 000.
B)Dr Investment in UJV $3 000 000,Cr Cash $3 000 000.
C)Dr Deferred Exploration Expenditure $3 000 000,Cr Cash $3 000 000.
D)None of the above.

Question 28

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

Question 29

In July 20X6,Midstream Ltd entered into a joint venture operation with Delta Ltd to explore for minerals in the area of interest KP97.Midstream Ltd contributed $5 000 000 in cash and Delta Ltd contributed specialised drilling equipment with an agreed fair value of $5 000 000.The venturers shared control of the operation.All the assets of the operation were held by the venturers as tenants in common.The estimated useful life of the plant was five years.In the accounts of Delta Ltd,this equipment was carried at cost $6 000 000 less accumulated depreciation $3 000 000.For the year ended 30 June 20X7,the following financial statements were prepared by the joint venture manager (amounts in thousands): Balance Sheet as at 30 June 20X7
$\begin{array}{lll}\text { Assets }\\\text {Cash }&\$2000\\\text {Equipment (net of accumulated depreciation \( \$ 1000 \) ) }&4000\\\text { Total assets } & \$ 6000 \\\text { Less liabilities } & 1000\\\text { Venture capital }&\$5000\end{array}$
Performance Statement for the Year ended 30 June 20X7
Interest revenue $\quad$$\quad$$\quad$ $300
Exploration expenditure $\quad$$\quad$ 5300 At 30 June 20X7,the exploration had not yet advanced to the stage where a reliable estimate could be made of the recoverable mineral reserves in KP97.
The journal entry to record the initial investment of Midstream Ltd would be:

A) Debit Investment in Joint Venture $5 000 000 and Credit Cash $5 000 000.
B) Debit Cash $2 500 000, Debit Plant and Equipment $2 500 000 and Credit Cash $5 000 000.
C) Debit Investment in Joint Venture $2 500 000, Debit Plant and Equipment $2 500 000 and Credit Cash $5 000 000.
D) None of the above.

Question 30

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

Question 31

In July 20X6,Midstream Ltd entered into a joint venture operation with Delta Ltd to explore for minerals in the area of interest KP97.Midstream Ltd contributed $5 000 000 in cash and Delta Ltd contributed specialised drilling equipment with an agreed fair value of $5 000 000.The venturers shared control of the operation.All the assets of the operation were held by the venturers as tenants in common.The estimated useful life of the plant was five years.In the accounts of Delta Ltd,this equipment was carried at cost $6 000 000 less accumulated depreciation $3 000 000.For the year ended 30 June 20X7,the following financial statements were prepared by the joint venture manager (amounts in thousands): Balance Sheet as at 30 June 20X7
$\begin{array}{lll}\text { Assets }\\\text {Cash }&\$2000\\\text {Equipment (net of accumulated depreciation \( \$ 1000 \) ) }&4000\\\text { Total assets } & \$ 6000 \\\text { Less liabilities } & 1000\\\text { Venture capital }&\$5000\end{array}$
Performance Statement for the Year ended 30 June 20X7
Interest revenue $\quad$$\quad$$\quad$ $300
Explaration expenditure $\quad$$\quad$ 5300 At 30 June 20X7,the exploration had not yet advanced to the stage where a reliable estimate could be made of the recoverable mineral reserves in KP97.
The journal entry to record the initial investment of Delta Ltd would be:

A) Debit Investment in Joint Venture $5 000 000, Credit Plant and Equipment $6 000 000, Debit Accumulated Depreciation $3 000 000, Credit Gain on Disposal of Property, Plant and Equipment $1 000 000, Credit Unearned Income $1 000 000.
B) Debit Cash $2 500 000, Debit Plant $2 500 000, Credit Plant and Equipment $6 000 000, Debit Accumulated Depreciation $3 000 000, Credit Gain on Disposal of Property, Plant and Equipment $1 000 000, Credit Unearned Income $1 000 000.
C) Debit Investment in Joint Venture $5 000 000 and Credit Plant Disposal account $5 000 000.
D) None of the above.

Question 32

The line-by-line method of accounting for interests in jointly controlled entities is recommended by AASB 11 because:

A) it reflects the venturer's control over the future economic benefits.
B) it is the method used for jointly controlled operations and jointly controlled assets, which only differ from jointly controlled entities in their legal form.
C) it is consistent with the legal form of a joint arrangement.
D) none of the above.

Question 33

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

A) significant joint venture interests.
B) contingent liabilities arising from joint ventures.
C) capital commitments arising from joint ventures.
D) all of the above.

Question 34

Alternative reporting formats are allowed under AASB 11 for jointly controlled entities.

Question 35

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.

Question 36

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

A) discloses joint venture liabilities.
B) offsets joint venture liabilities against assets.
C) does not recognise liabilities.
D) none of the above.

Question 37

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'?

Question 38

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.

Question 39

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