SOLUTIONS TO CHAPTER 3.

JOINT ARRANGEMENTS

Problem 1. Requirement 1 only (Please ignore requirement 2).

A. Journal entries in three separate sets of books to record operators’ contribution:
Books of Joint Operation Books of Magnetic Books of Silvery
Cash 5,000,000 Cash in JO 2,500,000 Cash in JO 2,500,000
Machinery 5,000,000 Machinery in JO 2,500,000 Machinery in JO 2,375,000
Magnetic 5,000,000 Cash 5,000,000 Gain on sale 125,000
Silvery 5,000,000 Machinery 4,750,000

Cash 15,000,000 Cash in JO 7,500,000 Cash in JO 7,500,000

Magnetic 7,500,000 Cash 7,500,000 Cash 7,500,000

Note 1. Magnetic’s recorded share of contributed assets in its own books is exactly ½ of amounts
Initially contributed and carried at fair value in the books of the joint operation.
2. Silvery records in its own books a one-half share of the cash contributed by Magnetic, but not
Over the machinery it itself contributed. IASB requires that in the event of an indicated gain,
I.e. the excess of its fair value over the book carrying value, P250,000, only the portion of the
gain for the other operator(s) may be realized by the contributing operator and its own share
of the gain must be deferred and deducted from its fair value share of the contributed non-
monetary asset. The following are the relevant computations.
Machinery , per books of JO: P5,000,000 x ½ P2,500,000
Less deferred gain (P250,000 x ½) (125,000)
Machinery, per books of Silvery P2,375,000
Note: computed over cost to Silvery of the machinery, the same amount is derived:
BCV of machinery, P4,750,000 x ½ equals P2,375,000
3. The recorded Cash in JO in the respective records of the operators over the additional cash
contributions is self-explanatory.
B. Additional entries recorded in the three set of books during the accounting period 2017

Books of JO Books of Magnetic Books of Silvery

Machinery 2,000,000 No entry No entry
Wages 4,600,000
Supplies 8,000,000
Overhead 5,500,000
Depreciation 1,400,000
O. Expenses 500,000
Cash 19,750,000
Accrued wages 100,000
Accounts payable 750,000
Acc. Depreciation 1,400,000
WIP 18,500,000 No entry No entry
 Wages 4,600,000
Supplies 7,000,000
Overhead 5,500,000
Depreciation 1,400,000
FG Inventory 13,500,000 No entry No entry
WIP 13,500,000
Magnetic 6,750,000 Memo entry
Silvery 6,750,000 Memo entry
FG Inventory 13,500,000
C. Adjusting entries in the books of the operators by the year-end to recognize their interests in
the Joint Operation as at December 31, 2017. (Using the reports submitted by the Joint
Operation combined with the operators’ share of contributed assets to the JO already recorded
in their respective records).

Books of Magnetic Books of Silvery

Machinery in JO 1,000,000 Machinery in JO 1,000,000
Supplies in JO 500,000 Supplies in JO 500,000
WIP in JO 2,500,000 WIP in JO 2,500,000
Inventory 6,750,000 Inventory 6,750,000*
O. expenses in JO 250,000 O. expenses in JO 250,000
Accrued wages in JO 50,000 Accrued wages in JO 50,000
A. Payable in JO 375,000 A. payable in JO 375,000
Accum. Deprn. In JO 700,000 Accum. Deprn. In JO 700,000*
Cash in JO 9,750,000 Cash in JO 9,750,000

No entry (Complete adjustment already Accum. Depn in JO 25,000

Recorded). Inventory 25,000

 These amounts are fair-value-based just like Magnetic’s, but because Silvery’s Machinery in
JO is only P3,375,000 (P2,375,000 + P1,000,000), its depreciation expense is P25,000 less
than that of Magnetic’s, as follows:
Magnetic : P3,500,000 x 20% (also P1,400,000 x 50%) P 700,000
Silvery : P3,375,000 x 20% 675,000
Difference P 25,000
Since depreciation expense becomes part of work-in-process , this P25,000 difference is
deducted from inventory (for simplicity rather than pro-rated to WIP and FG) and also from
Accumulated depreciation initially computed from the fair value of the asset. This explains
the additional adjustment in the books of Silvery.

D. Review of Assets, Liabilities, and Operating expenses of the Joint Operation for 2017:
By Magnetic By Silvery
Cash 250,000/2 P 125,000 Cash 250,000/2 P 125,000
 Machinery 7,000,000/2 3,500,000 Mach. [(7,000,000/2)–125,000] 3,375,000
Supplies 1,000,000/2 500,000 Supplies 1,000,000/2 500,000
WIP 5,000,000/2 2,500,000 WIP 5,000,000/2 2,500,000
Inventory 13,500,000/2 6,750,000 Invty [(13,500,000/2) P25,000] 6,725,000
AW 100,000/2 ( 50,000) AW 100,000/2 ( 50,000)
AP 750,000/2 ( 375,000) AP 750,000/2 ( 375,000)
OE 500,000/2 250,000 OE 500,000/2 250,000
Acc, Depn 1,400,000/2 ( 700,000) Acc. Depn[ (1,400,000/2) – 25,000] ( 675,000)

The above schedules support the adjusting entries recorded by the operators at December 31,
2017.

Problem 2.
1. Journal entries
Investment in Joint Venture 1,562,500
Cash 1,562,500

Cash 24,000
Investment in Joint Venture 24,000

Investment in Joint Venture 71,875

Profit from Joint Venture 71,875

Balance of Investment in JV in Balance Sheet, 12/31/17 P1,610,375

Accounted for as follows from share in net assets of JV:
Cash (P 64,500 x ½) P 32,250
Accounts receivable (P500,000 x ½) 250,000
Inventory (P781,250 x ½) 390,625
PPE, net (P2,781,250 x ½) 1,390,625
Share in total assets P2,063,500
Less share in liabilities
Liabilities (P906,250 x ½) 453,125 P1,610,375
2. Combined statement of income and Retained Earnings ended December 31, 2017
Revenues P13,500,000
Expenses 11,600,000
Profit from own operations P 1,900,000
Add share from profit of joint venture 71,875
Net income P 1,971,875
Add Retained earnings, January 1 1,150,000
Retained earnings, December 31 P 3,121,875

Balance sheet as of December 31, 2017

 Cash P 661,500 Liabilities P1,050,000
Accounts receivable 600,000 Share capital 3,750,000
Inventory 1,050,000 Retained earnings 3,121,875
PPE P4,875,000
Less AD 875,000 4,000,000
Investment in JV 1,610,375
Total assets P7,921,875 Total liab and Equity P7,921,875

Problem 3
Cost Model FV Model Equity Model
Inv, cost Inv. In JV 128,000 Inv. In JV 128,000 Inv. In JV 128,000
Cash 128,000 Cash 128,000 Cash 128,000
Trans cost Inv. In JV 2,560 P&L 2,560 Inv. In JV 2,560
Cash 2,560 Cash 2,560 Cash 2,560
Cash Div. Div. Rec. 4,500 Div. Rec. 4,500 Div. Rec. 4,500
P&L 4,500 P&L 4,500 Inv. In JV 4,500
FVR Not applicable Inv. In JV 12,000@ Not applicable
P&L 12,000
Share in NI Not applicable Not applicable Inv. In JV 15,000
P&L 15,000
Imp Loss None Not applicable P&L 8,060
Inv. In JV 8,060
P&L P 4,500 P&L P 13,940 P&L 6,940
Inv. In JV 130,560@ Inv. In JV 140,000@ Inv. In JV 133,000
TEST FOR IMPAIRMENT LOSS FV REMEASUREMENT TEST FOR IMPAIRMENT LOSS
@ BCV P130,500 BCV P128,000 BCV 141,060
ERA (P140,000 x 95%) 133,000 FV 140,000 ERA 133,000
Imp. Loss None FVR P12,000 Imp. Loss (8,060)

Problem 4.
1. Books of JO Books of EE Books of FF

Cash 600,000 Cash in JO 360,000 Cash in JO 240,000

Equipment 400,000 Eqpt in JO 240,000 Eqpt in JO 144,000
EE 600,000 Cash 600,000 Gain on sale 24,000
FF 400,000 Equipment 360,000

Notes (a) EE’s recognized assets are 60% of the acquisition costs of the JO for the operators’
respective contributions. Cash in JO (P600,000 x 60%) and Eqpt in JO (P400,000 x
60%)
(b) FF’s recognized assets are 40% of the cash in JO (P600,000 x 40%) and 40% of the
Equipment in the JO (P400,000 x 40%) less a deferred gain of P16,000 (P40,000 x
 40%) equals P144,000. Or, cost-based, P360,000 x 40% gives the same result.

2. No complete adjusting entry as of December 31, 2017 can be recorded due to insufficient data,
we can only describe the adjustments to be recognized by EE or FF over its Cash in JO and its
Equipment in JO accounts, respectively.
Operator EE Operator FF
Cash in JO Eqpt in JO Cash in JO Eqpt in JO
Book carrying values P 360,000 P 240,000 P 240,000 P 144,000
Dr (Cr) adjustments (144,000) ( 48,000) (96,000) (28,800)
Required EOY balances P 216,000 P192,000 P 144,000 P 115,200

Notes (a) The net decrease in the cash of the JO is P240,000 (P600,000 – P360,000), allocated to
the operators on a 6:4 ratio. i.e. a credit to the Cash in JO account of P144,000 and
P96,000, to EE and FF, respectively.
(b) The credits to Equipment in JO for the operators in 2017 represent the amounts of
Depreciation recognized by the operators at 20% rate on their respective carrying
Values, as follows:
EE P240,000 x 20% P 48,000
FF P144,000 x 20% 28,800
3. The Equipment in JO (net of Accumulated Depreciation) to be recognized by FF in its December
31, 2017 statement of financial position is P115,200, computed as follows:
Equipment in JO at fair value (P400,000 x 80%) x 40% P128,000
Less Unamortized deferred gain (P16,000 x 80%) 12,800
Equipment in JO, net P115,200

Or (P360,000 x 80%) x 40% P115,200

Or (P144,000 x 80%) P 115,200
4. The Equipment in JO (net of Accumulated Depreciation) to be recognized by EE in its December
31, 2017 statement of financial position is P192,000, computed as followsL
Equipment in JO (P400,000 x 80%) x 60% P192,000

Or P240,000 x 80%) P192,000

MC – THEORIES
1. A 6. D
2. B 7. B
3. A 8. B
4. D 9. D
5. C 10. A
MC – PROBLEMS
1. C 11. C 21. D
2. D 12. A 22. C
3. C 13. C 23. A
4. B 14. B 24. B
5. A 15. C 25. A
6. A 16. C
7. A 17. B
8. C 18. C
9. B 19. C
10. A 20. B