In July 20X6,Midstream Ltd Entered into a Joint Venture Operation

Multiple Choice

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.