Since 1977

ADVANCED FINANCIAL ACCOUNTING DE LEON/DE LEON/ALENTON

AFAR 3213 – JOINT ARRANGEMENTS BATCH MAY 2022

LECTURE NOTES

Effective January 1, 2013, IFRS11 – JOINT Accounting by the venturer or by the operator for its
ARRANGEMENTS superseded PAS31 – INTERESTS IN interest in the joint arrangement, generally, would be as
JOINT VENTURES and also SIC13 – JOINTLY follows:
CONTROLLED ENTITIES – ACCOUNTING FOR NON-
MONETARY CONTRIBUTIONS BY VENTURERS. FINANCIAL STATEMENTS OF PARTIES TO A JOINT
ARRANGEMENTS.
IFRS 11 defines a JOINT ARRANGEMENT as a contractual 1. IFRS-11 requires a joint operator to recognize and
agreement whereby two or more parties undertake an measure the assets and liabilities (and recognize the
economic activity that is subject to JOINT CONTROL. This related revenues and expenses) in relation to its
means no single venturer or operator should be in a interest in the arrangement in accordance with
position to control the joint arrangement unilaterally. relevant IFRSs applicable to the particular assets,
Each venturer/operator that participates in the joint liabilities, revenues, and expenses.
control of the joint arrangement must be identified and 2. IFRS-11 requires a joint venturer to recognize an
disclosed appropriately. INVESTMENT and to account for that investment
using the EQUITY METHOD in accordance with PAS
JOINT CONTROL is the CONTRACTUALLY AGREED sharing 28 – INVESTMENTS IN ASSSOCIATES AND JOINT
of control of an arrangement, which exists only when the VENTURES, unless the entity is exempted from
decisions about the RELEVANT ACTIVITIES require the applying the equity method as specified in that
unanimous consent of the parties sharing control. The standard.
relevant activities of an arrangement are those that
significantly affect the investee’s RETURNS, and the Basic Illustration – Equity Method
investor must have the POWER and capability to affect 1. On January 1, 2020 Venturer A invested P400,000 for
these variable returns to which it is exposed , or has a 40% interest and Venturer B invested P600,000 for
rights, under the terms of the contractual agreement. a 60% interest in a joint arrangement, Corporation C,
Often, the agreement among the parties is in writing, but which will issue 8,000 ordinary shares at P100 par
not always. value each.
2. The joint venture purchased merchandise worth
Under IFRS 11, a JOINT ARRANGEMENT is either a JOINT P400,000, paying P300,000, the balance on account.
OPERATION or a JOINT VENTURE. An entity sharing 3. The joint venture paid expenses amounting to
control in the joint arrangement must assess its rights P50,000.
and obligations arising from the undertaking. If the 4. Cash sales, P600,000; cost of sales, P300,000.
entity has rights to the assets and obligations for the
liabilities relating to the arrangement, then the Required: Prepare journal entries in the books of A, B,
undertaking is a joint operations and parties sharing and Corporation C.
control are called JOINT OPERATORS. If an entity has
rights to the net assets, the arrangement is a JOINT A B C
VENTURE and parties sharing control are called JOINT Inv in JV 400,000 Inv in JV 600,000 Cash 1,000,000
VENTURERS. Cash 400,000 Cash 600,000 CS 800,000
APIC 200,000
In assessing its rights and obligations, the venturer or
the operator must look into the (1) structure and legal No entry No entry MI 400,000
form of the arrangement; (2) terms of the contractual Cash 300,000
agreement; and (3) other relevant facts and A/P 100,000
circumstances. For example, if the activities of the joint
arrangement will not be carried through a SEPARATE No entry No entry Exp 50,000
VEHICLE, then the arrangement is a joint operation. If Cash 50,000
carried in a separate vehicle, then its legal form could
help assess the nature of an entity’s rights and No entry No entry Cash 600,000
obligations: if it is a general partnership, the Sales 600,000
arrangement is deemed to be a joint operations because
the entity would still have rights to the assets and CLOSING ENTRIES Sales 600,000
obligations for liabilities; if it is a corporation, the COS 300,000
arrangement is deemed to be a joint venture as the Exp 50,000
corporation itself would have rights to assets and I/S 250,000
obligations for liabilities (not the venturer), unless the
terms of the contractual agreement and other facts and Inv in JV 100,000 Inv in JV 150,000 I/S 250,000
circumstances would show otherwise. In all cases, these P/L 100,000 P/L 150,000 RE 250,000
three factors unilaterally or c ollectively determine the
nature of an entity’s rights and obligations relating to the
joint arrangement.

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EXCEL PROFESSIONAL SERVICES, INC.

Accounting for SALE or CONTRIBUTION of assets to a Accounting for PURCHASES of Assets from the Joint
Joint Operation. Operation.
• When an entity enters into a transaction with a joint • When an entity enters into a transaction with a Joint
operation in which it is a joint operator, such as a Operation in which it is a joint operator, such as a
sale or contribution of assets, it is conducting the purchase of assets, it shall not recognize its share of
transaction with the other parties to a joint operation the gains and losses until it resells those assets to a
and, as such, the joint operator shall recognize gains third party.
and losses resulting from such a transaction only to
the extent of the other parties’ interest in the joint For example, assume D sells an equipment having a book
operation. value of P200,000 to B for a price of P275,000. Since B
has a 1/3 interest in D, it must defer P25,000 of D’s gain
For example, assume A, B, and C jointly control D in order not to violate the realization concept under
(each having a 1/3 interest) and A sells equipment GAAP. B would report the equipment in its balance sheet
having a book value of P40,000 to the joint operation as follows:
for P100,000. Only 2/3 of the apparent gain of Equipment P 275,000
P60,000, or P40,000 maybe realized. On A’s balance Less deferred gain 25,000
sheet, the following will be presented: Net (P200,000 + P50,000 gain) P 250,000
Equipment (1/3 x P100,000) P33,333
Assume the equipment has a remaining useful life of 10
Less Unrealized gain (P1/3 x P60,000) 20,000
years. B would report the asset at the end of the first
Net (1/3 x P40,000 pre-transfer amt) P 13,333
year as follows
Equipment P 275,000
Assume the asset has useful life of 5 years from the date
Less accumulated depreciation 27,500
of the transaction. The deferred gain would be amortized
Book carrying value P 247,500
at a rate of P4,000/year. At the end of the first year, D
Less deferred gain (P25,000 –
would present the equipment as follows:
P2,500) 22,500
Equipment P100,000
Net book value (90% x P250,000) P225,000
Less Accumulated Depreciation 20,000
Depn expense (P27,500 – P2,500) P 25,000@
Book value P 80,000
@ (P250,000 x 10%)
and A would present the equipment as follows:
• When such transactions provide evidence of a
Equipment (1/3 x P80,000) P 26,667
reduction in the NRV of the assets to be purchased or
Less Unrealized gain (P20,000-P4,000) 16,000
of an impairment loss of those assets, a joint
Book value 1/3 x (P40,000 – P8,000) P 10,667
operator shall recognize its share of those losses.
• When such transactions provide evidence of a
For example, assume D sells an equipment carried at
reduction in the NRV of the assets to be sold or
P50,000 to B for P44,000 and records a loss of
contributed to the Joint Operation, or of an
P6,000. B (and the other operators) recognizes a
impairment loss of those assets, those losses should
P2,000 loss and B reports the asset on its balance
be recognized fully by the joint operator.
sheet at P44,000. Since no portion of the apparent
loss has been deferred, the 1/3 loss of P2,000 will
For example, assume C (a 1/3 owner of D) transfers
not be added to the carrying value of the asset (as
an asset it had been carrying at P150,000 to D at a
would have been the case if B treated only the
price of P120,000. C must recognize the full loss of
P4,000 loss realized by unrelated parties A and C as
P30,000 at the time of the transfer and picks up its
being recognizable,)
1/3 interest in the asset held by D (1/3 x P120,000 =
P40,000) as its own asset in its balance sheet before
considering any depreciation, and so on.

IFRS for SMEs provide three (3) methods of accounting for its interest in the joint venture: (a) the cost model, (b) the
fair value model, and (3) the equity model. This means that the proportionate consolidation method may not be used
if the venturer is an SME. The equity method available to the SME is similar to the equity method discussed under IAS
31. To establish similarities and differences among the three methods, the following are pro-forma entries for selected
transactions.

Transactions Cost Model Fair value Model Equity Model

Original investment Inv. in JV X Investment in JV x Inv. in JV X
Cash X Cash X Cash X
Transaction cost Inv. in JV X Profit and Loss X Inv. in JV X
Cash x Cash X Cash X
Cash dividends Cash X Cash X Cash X
Profit & Loss X Profit and Loss X Inv. in JV X
Year-end adjustment
FV remeasurement Inv. in JV X
Profit and loss X
Share of net income Inv. in JV X
Profit & Loss X
Share of impairment Profit and Loss x Profit & Loss X
loss
Inv. in JV X Inv. in JV X

If published price quotations are available, use of the cost model is not allowed.. In the absence of published price
quotations the method to be used is deemed to be a matter of choice.

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EXCEL PROFESSIONAL SERVICES, INC.

STRAIGHT PROBLEMS

Problem 1. JOINT OPERATIONS – UNINCORPORATED ENTITY COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
SHARING OUTPUT TO OPERATORS.
Revenues P500,000
On January 1, 2020, NIKKI CORPORATION and CANDICE, INC. Expenses 385,000
establish a joint arrangement to manufacture a product. Each Net income P 115,000
company has a 50% interest in the activity and will share on Retained earnings, Jan 1, 2020
total output equally. Cash dividend paid (38,400)

NIKKI’s initial contribution consisted of P4,000,000 cash and Retained earnings, Dec 31, 2020 P 76,600
CANDICE contributed machinery that was carried in its books at
P3,800,000. The fair value of the machinery at that date was BALANCE SHEET
P4,000,000. During the first year of operation both parties Cash P51,600 Liabilities P725,000
contributed a further P6,000,000 each. Accounts
receivable 400,000 Share capital 2,500.000
On December 31, 2020, the manager of the joint operations Inventory 625,000 Retained
provided the following statements: earnings 76,600
Plant, Property,
Costs incurred for the year ended December 31, 2020: Equipt. 2,350,000
Accum
Wages P3,680,000 Depreciation ( 125,000) ________
Supplies 5,600,000 Total P3,301,600 Total P3,301,600
Overheads 4,400,000
Depreciation 1,120,000 The financial statements of MAXINNE CORPORATION, one of the
P14,800,000 venturers, for the same period follow:
Cost of FG inventory 10,800,000
Work-in-Process, 12/31/20 P 4,000,000 Revenues P10,800,000
Expenses 9,280,000
Receipts and Payments for year ended December 31, 2020: Profit 1,520,000
Share capital 3,000,000
Receipts: Retained Earnings 920,000
Original contributions P 4,000,000 Liabilities 840,000
Additional contributions 12,000,000 Totals P6,280,000
Total P 16,000,000
Cash P 529,200
Payments: Accounts receivable 480,000
Machinery (1/2/20) P 1,600,000 Inventory 840,000
Wages 3,600,000 Plant, Property, and Equipment 3,900,000
Supplies 6,000,000 Accumulated Depreciation (700,000)
Overheads 4,200,000 Investment in Joint Venture 1,230,800
Operating expenses 400,000 15,800,000 Totals P6,280,000
Closing cash balance P 200,000
Required:
Assets and liabilities at December 31, 2020 1. Prepare journal entries in the books of MAXINNE
Assets: CORPORATION using the Equity Method.
Cash P 200,000
2. Prepare the financial statements for 2020 for MAXINNE
Machinery P5,600,000
CORPORATION.
Accum Depreciation 1,120,000 4,480,000
Supplies 800,000
Problem. 3
Work-in-process 4,000,000
JOINT VENTURE – THE VENTURER IS AN SME.
Total assets P 9,480,000
1. On January 1, 2020 SME JJ CORPORATION acquired 25%
of the equity of ARMSTRONG CORPORATION for P102,400.
Liabilities:
SME Jj shares in the joint control over the relevant
Accrued wages P 80,000
activities of the joint venture in relation to its operations.
Accounts payable 600,000
Transaction costs of 2% of the purchase price of the shares
Total liabilities P 680,000
were incurred by SME JJ.
2. On December 31, 2020 ARMSTRONG CORPORATION
Net assets P 8,800,000
declared dividends of P14,400. These dividends are to be
paid by L in 2021.
Required:
3. For the year ended December 31, 2020, ARMSTRONG
1. Prepare the journal entries in the records of NIKKI
CORPORATION recognized a profit of P48,000.
CORPORATION and CANDICE, INC. in relation to the joint
4. Published price quotations do no exist for the shares of
operation.
ARMSTRONG CORPORATION. Using appropriate valuation
techniques SME JJ determined the fair value of its
Problem 2 – JOINT VENTURE – INCORPORATED ENTITY
investments in L CORPORATION at December 31, 2020 as
SHARING PROFITS TO VENTURERS.
P112,000. Costs to sell are estimated at 5% of the fair
On January 1, 2020, MAXINNE CORPORATION signed a joint
value of the investment. SME J does not prepare
venture agreement with another venturer, ALETT ENTERPRISES.
consolidated financial statements because it does not have
for the production of a special product. BLANCHE COMPANY is
any subsidiary (ies).
established to carry on the business venture, with each venturer
contributing P1,250,000 for equal shares in the company’s
Required:
200,000 P12.50 par value shares. They will share profits
Prepare appropriate journal entries in the books of SME JJ for
equally.
the ARMSTRONG CORPORATION under each of the three (3)
methods.
On December 31, 2020, the financials of BLANCHE COMPANY,
the joint venture entity, follows:

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MULTIPLE CHOICE

HORNETS, INC. and ANGULAR COMPANY are venturers production of CDs. DEF Corp. is established to carry on
in a joint arrangement sharing control and profits the business venture, with each venturer contributing
equally. They contributed P500,000 each to establish P800,000 for equal shares in the company’s 128,000
Joint Venture JJJ early in 2020. The Joint Venture paid P12.50 par value shares. They will share profits equally.
cash dividends of P36,000 and reported a net income of
P144,000 during the year. On December 31, 2020, the financials of DEF Corp
On the other hand, HORNETS paid cash dividends of follow:
P18,000 and reported a net income of P72,000 during COMBINED STATEMENT OF INCOME AND RETAINED
the year. Its Retained Earnings at the beginning of the EARNINGS
year is P100,000. Revenues P320,000
1. At what amounts will HORNETS report in its Expenses 246,400
December 31, 2020 balance sheet the Investment in Net income P 73,600
Joint Venture and Retained Earnings accounts, Retained earnings, Jan 1, 2020 ___-____
Retained earnings, Dec 31, 2020 P 92,000
respectively?
a. P503,600 and P200,800 BALANCE SHEET
b. P500,720 and P200,080 December 31, 2020
c. P554,000 and P226,000
d. P522,320 and P161,200 Cash P57,600 Liabilities P464,000
Accounts Share 1,600,000
On January 1, 2020, ELASTIC COMPANY and FIREBRAND receivable 256,000 capital
CORPORATION have entered into a joint operation, Inventory 400,000 Retained
sharing control on a 6:4 ratio, They further agreed that earnings 73,600
contributions and profits will be in the same proportion. Plant, Property,
ELASTIC contributed cash while FIREBRAND contributed Equipt. 1,504,000
equipment at its cost of P288,000 and an estimated Accum ________
remaining economic life of 5 years. The operators’ total Depreciation ( 80,000)
initial contribution recorded in the books of the joint Total P2,137,600 Total P 2,137,600
operation is P800,000. No other transaction had
transpired between the operators and the joint operation The financial statements of ABC Company for the same
during 2020. period, before the adjustment for its share of DEF’s net
income, follow:
ELASTIC and FIREBRAND also agreed that MUTUAL Revenues P6,912,000
CONSENT is necessary for all management decisions Expenses 5,939,200
regarding the joint undertaking regardless of the agreed Profit 972,800
ratios aforementioned. Share capital 1,920,000
Retained Earnings 588,800
On December 31, 2020, the joint operation reported a Liabilities 537,600
cash balance of P288,000 and equipment at a net Totals P4,019,200
carrying value of P256,000 in its balance sheet.
Cash P 326,400
2. The journal entry recorded by the operators in their Accounts receivable 307,200
respective books on January 1, 2020 will not include Inventory 537,600
Plant, Property, and
a. A debit to Cash in JO of P288,000 by Elastic
Equipment 2,496,000
b. A debit to Eqpt in JO of P192,000 by Elastic
Accumulated (448,000)
c. A debit to Cash in JO of P192,000 by Firebrand Depreciation
d. A credit to gain on sale of P32,000 by Firebrand Investment in Joint 800,000
Venture
3. The adjusting entry that will be recorded by the Totals P4,019,200
operators in their respective books on December 31,
2020 will not include 5. Determine the amount of retained earnings to be
reported by ABC in its balance sheet at December
a. a credit to Cash in JO of P115,200 by Elastic
31, 2020:
b. a credit to Acc Depn in JO of P23,040 by a. P 588,800 c. P3,518,400
Firebrand b. P 625,600 d. P1,598,400
c. a credit to Cash in JO of P76,800 by Firebrand
d. a credit to Acc Depn in JO of P32,000 by Elastic 6. Determine the balance of the Investment in JV to be
reported by ABC in its balance sheet at December
4. The Equipment in JO (net of Accumulated 31, 2020:
Depreciation) to be recognized by Firebrand in its a. P 0 c. P 800,000
b. P 836,800 d. P 832,256
December 31, 2020 balance sheet is
a. P92,160 c. P102,400 On January 1, 2020, SME A acquired a 35% equity of Y
b. P90,000 d. P174,400 CORPORATION for P74,240. SME A shares in the joint
control of the relevant activities of Y CORPORATION in
On January 1, 2020, ABC Company. signed a joint relation to its profitable operations. Transaction costs of
venture agreement with another venturer for the

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EXCEL PROFESSIONAL SERVICES, INC.

5% of the purchase price of the shares were incurred by 14. In the final settlement, the amount due to OSANG
SME A. including her investment was:
a. P33,760 c. P33,024
On December 31, 2020, Y CORPORATION declared and b. P32,832 d. P33,984
paid dividends of P19,200.
A, B, and C are joint operators of JOINT OPERATION D
For the year ended December 31, 2020 Y CORPORATION (each having an equal share in interest). On January 1,
recognized a loss of P53,760. 2020, A sells equipment having a book value of P40,960
to the OPERATION for P102,400. The equipment had an
Published price quotations do not exist for the shares of estimated useful economic life of 5 years at that date.
Y CORPORATION. Using appropriate valuation techniques 15. At what amount will A show this equipment at its
SME A determined the fair value of its investment in Y balance sheet at January 1, 2020?
CORPORATON at December 31, 2020 as P83,200. Costs a. P13,654 c. P17,067
to sell are estimated at 9% of the fair value of the b. P34,134 d. P 0
investment. SME A does not prepare consolidated
financial statements because it does not have any 16. At what amount will A show this equipment at its
subsidiary. balance sheet at December 31, 2020?
a. P27,306 c. P34,134
7. What is the profit (loss) to be recognized by SME A b. P10,922 d. P13,654
in 2020 from entity Y CORPORATION under the fair
value method?
a. P10,560 c. P11,968
b. P 7,680 d. P 2,880

8. What is the profit (loss) to be recognized by SME A

in 2020 from Y CORPORATION using the cost model?
a. P 4,480 c. P(19,200)
b. P(13,747) d. P( 947)

9. What is the profit (loss) to be recognized by SME A

in 2020 from Y CORPORATION using the equity
model?
a. P (18,816) c. P 3,315
b. P 6,272 d. P (1,485)

10. What is the amount of Investment in Y

CORPORATION to be recognized by SME A in its
2020 balance sheet, using the cost model?
a. P 75,712 c. P 74,240
b. P 77,952 d. P 75,392

11. What is the amount of Investment in Y

CORPORATION to be recognized by SME A in its
2020 balance sheet using the fair value model?
a. P 75,712 c. P 52,416
b. P 83,200 d. P 74,240

12. What is the amount of Investment in Y

CORPORATION to be recognized by SME A in its
2020 balance sheet using the equity model?
a. P 83,200 c. P 52,416
b. P 74,240 d. P 75,712

MENCHU and OSANG in a joint operation, contributed

P19,200 each in order to purchase canned goods which
were sold by lots at a closing-out sale. They agreed to
divide their profits equally and each shall record her
purchases, sales and expenses in his own books. After
selling almost all the canned goods, they wind up their
venture. The following are the transactions:

Joint operation credit balances were OSANG, (P15,360)

and MENCHU, (P13,440). Expenses paid from Joint
operation cash were P1,920 by OSANG and P2,496 by
MENCHU. Cost of unsold canned goods which OSANG
and MENCHU agreed to assume were P576 and P896
respectively.
13. The total sales of the joint venture were:
a. P 71,616 c. P 68,672
b. P 67,200 d. P 76,224

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