Chapter 11 Problem I 1. Oil Pipeline Pipeli ne . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Oil Pipeline operating expenses (30% x P12,000,000). . . . . . . . . . . . . . Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenue from Oil Pipeline (30% x P19,800,000) . . . . . . . . . . . . . . . . Amortization expense – pipeline pipeli ne (P18,000,000/20 (P18,000,000 /20 years). . . . . . . . . . . Accumulated Accumulated depreciation – oil pipeline. pipeline . . . . . . . . . . . . . . . . . . . . .
18,000,000 18,000,0 00 18,000,000 18,000,0 00 3,600,000 3,600,000 3,600,00 0 5,940,000 5,940,000 900,000 900,000
Thus, the share of X Inc. in net income of the joint operations would be as follows:
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Operating expenses. expense s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization Amortization expense: P18,000,000 ( 30%) / 20 years. . . . . . . . P60,000,000 P60,000,0 00 (100%) / 20 years. . . . . . . . Net Income of the Joint Operation. . . . . . . . . . . . . . . . . . . . . . . . . . . . Multiplied Multipli ed by: 30% interest. interes t. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Income of X. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proportionate Total (100% Share (30%) based) P 5,940,000 P19,800,000 P19,800,0 00 3,600,000 12,000,000 12,000,0 00 900,000 _3,000,000 _3,000,00 0 P 4,800,000 4,800,00 0 __________ ____ ______ ______30% ____ __30% P 1,440,000 1,440,00 0 P 1,440,000 1,440,00 0
Problem II 1. The following journal journal entries would be recorded: Pipeline Pipeli ne . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Steel Pipes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on steel pipes (70%* of gain). . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain – contra account (30% of gain, P4,800,000) . . . .
18,000,000 18,000,0 00 13,200,000 13,200,0 00 3,360,000 3,360,00 0 1,440,000
The following should be observed in relation to t he above journal entry: recognize a gain of of P3,360,000 [70% x (P18,000,000 – P13,200,000)]* P13,200,000)]* • X should recognize •
A portion of the gain can be recognized on the contribution of assets to a joint operation. PFRS 11 indicates the following: When an entity enters into a transaction with a joint operation in which it is a joint operator, such as a sale or contribution of assets, it is conducting the transaction with the other parties to the joint operation and, as such, the joint operator shall recognize shall recognize gains and losses losses resulting from such a transaction only to the *extent * extent of the other parties’ interests in the joint operation. operation. When such transactions provide evidence of a reduction in the net realizable value of the assets to be sold or contributed to the joint operation, or of an impairment loss of those assets, those losses shall be recognized fully by the joint operator.
•
A gain can be recognized when the significant risks and rewards have been t ransferred. Pipeline operating expenses (30% x P12,000,000). . . . . . . . . . . . . . . . . Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenue from Pipeline Pipeli ne (30% x P19,800,000) P19,800,00 0) . . . . . . . . . . . . . . . . . . .
3,600,000 3,600,000 3,600,00 0 5,940,000 5,940,000 5,940,00 0
Amortization Amortization expense – pipeline (P18,000,000/20 (P18,000,000/20 years). . . . . . . . . . . Accumulated depreciation depreci ation - pipeline. pipelin e. . . . . . . . . . . . . . . . . . . . . . .
900,000
Unrealized gain – contra account (P1,440,000/ (P1,440,000 / 20 years). . . . . . . . . . Amortization Amortizatio n expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72,000
900,000
72,000
The following should be observed in relation to t he above journal entry: • The joint operator’s own interest in the gain is recognized over the life of the asset. •
The unrealized gain is a contra account to the pipeline account; it should not be reported as a deferred gain on the liability side of the balance sheet. When X Inc., prepares a balance sheet, the unrealized gain will be offset against the pipeline such P1,440,000). As the net cost of the that the pipeline’s net cost is P16,560,000 (P18,000,000 – P1,440,000). pipeline is being amortized, the unrealized gain account is also being amortized. In effect, the unrealized gain is being brought into income over the life of the pipeline. As the pipeline is being used to generate revenue on transactions with outsiders, the operator’s own share of the unrealized gain is being recognized in net income. This is similar to what happened in Chapter 18 (Intercompany Sales of Property and Equipment) of Volume II, when the unrealized profits from an intercompany sale of a depreciable asset were realized over the life of the depreciable asset.
Thus, the share of X Inc. in net income of the joint operation would be as follows: Revenue (30% x P19,800,000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Operating expenses (30% x P12,000,0 P12,000,000) 00) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization Amortization expense: P60,000,000 x 30% = P18,000,000 / 20 years. . . . . . . . . . . Add: Gain on on steel pipes [70%* x (P18,000,000 – P13,200,000 )] . . . . . . . . . . . . . . . . . Realized gain – amortization**(P1,44 amortizati on**(P1,440,000/2 0,000/20 0 years). . . . . . . . . . . . . . . . . . . . . . . Net Income of X. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 5,940,000 3,600,000 3,600,00 0 900,000 3,360,000 3,360,00 0 _____72,000 _____ 72,000 P 4,872,000
11 states that: “When an entity enters into a transaction with a joint operation in which it is a joint operator, * PFRS 11 states such as a sale or contribution of assets, it is conducting the transaction with the other parties to the joint operation and, as such, the joint operator shall recognize shall recognize gains and losses resulting losses resulting from such a transaction only to the *extent *extent of the other parties’ interests in the joint operation .” ** Sales price of P18,000,000 – P18,000,000 – P13,200,000, P13,200,000, cost of steel pipes = P4,800,000 x 30% = P1,440,000
2. refer to the above entry Gain on steel pipes (70%* of gain). . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain – contra account (30% of gain, P4,800,000) . . . .
P3,360,000 P1,440,000
3. Amortization expense – pipeline pipeli ne (P18,000,000/20 (P18,000,000 /20 years). . . . . . . . . . . Less: Amortization Amortizatio n expense. expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization expense for the year…………………… year………………………………………… ……………………
P 900,0000 ____72,000 ____7 2,000 P 828,000
4. Pipeline Pipeli ne . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Net unrealized gain, end of 20x4: Unrealized gain – contra account (30% of gain, P4,800,000) P4,800,000 ) . . Less: Amortization for 20x4…………………… 20x4………………………………………… ……………………… … Net cost of Oil Pipeline……………… Pipeline……………………………………… ………………………………………. ……………….
P18,000,000 P18,000,0 00 P1,440,000 P1,440,00 0 ____72,000
__1,368,000 P16,632,000
Amortization Amortization expense – pipeline (P18,000,000/20 (P18,000,000/20 years). . . . . . . . . . . Accumulated depreciation depreci ation - pipeline. pipelin e. . . . . . . . . . . . . . . . . . . . . . .
900,000
Unrealized gain – contra account (P1,440,000/ (P1,440,000 / 20 years). . . . . . . . . . Amortization Amortizatio n expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72,000
900,000
72,000
The following should be observed in relation to t he above journal entry: • The joint operator’s own interest in the gain is recognized over the life of the asset. •
The unrealized gain is a contra account to the pipeline account; it should not be reported as a deferred gain on the liability side of the balance sheet. When X Inc., prepares a balance sheet, the unrealized gain will be offset against the pipeline such P1,440,000). As the net cost of the that the pipeline’s net cost is P16,560,000 (P18,000,000 – P1,440,000). pipeline is being amortized, the unrealized gain account is also being amortized. In effect, the unrealized gain is being brought into income over the life of the pipeline. As the pipeline is being used to generate revenue on transactions with outsiders, the operator’s own share of the unrealized gain is being recognized in net income. This is similar to what happened in Chapter 18 (Intercompany Sales of Property and Equipment) of Volume II, when the unrealized profits from an intercompany sale of a depreciable asset were realized over the life of the depreciable asset.
Thus, the share of X Inc. in net income of the joint operation would be as follows: Revenue (30% x P19,800,000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Operating expenses (30% x P12,000,0 P12,000,000) 00) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization Amortization expense: P60,000,000 x 30% = P18,000,000 / 20 years. . . . . . . . . . . Add: Gain on on steel pipes [70%* x (P18,000,000 – P13,200,000 )] . . . . . . . . . . . . . . . . . Realized gain – amortization**(P1,44 amortizati on**(P1,440,000/2 0,000/20 0 years). . . . . . . . . . . . . . . . . . . . . . . Net Income of X. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 5,940,000 3,600,000 3,600,00 0 900,000 3,360,000 3,360,00 0 _____72,000 _____ 72,000 P 4,872,000
11 states that: “When an entity enters into a transaction with a joint operation in which it is a joint operator, * PFRS 11 states such as a sale or contribution of assets, it is conducting the transaction with the other parties to the joint operation and, as such, the joint operator shall recognize shall recognize gains and losses resulting losses resulting from such a transaction only to the *extent *extent of the other parties’ interests in the joint operation .” ** Sales price of P18,000,000 – P18,000,000 – P13,200,000, P13,200,000, cost of steel pipes = P4,800,000 x 30% = P1,440,000
2. refer to the above entry Gain on steel pipes (70%* of gain). . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain – contra account (30% of gain, P4,800,000) . . . .
P3,360,000 P1,440,000
3. Amortization expense – pipeline pipeli ne (P18,000,000/20 (P18,000,000 /20 years). . . . . . . . . . . Less: Amortization Amortizatio n expense. expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization expense for the year…………………… year………………………………………… ……………………
P 900,0000 ____72,000 ____7 2,000 P 828,000
4. Pipeline Pipeli ne . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Net unrealized gain, end of 20x4: Unrealized gain – contra account (30% of gain, P4,800,000) P4,800,000 ) . . Less: Amortization for 20x4…………………… 20x4………………………………………… ……………………… … Net cost of Oil Pipeline……………… Pipeline……………………………………… ………………………………………. ……………….
P18,000,000 P18,000,0 00 P1,440,000 P1,440,00 0 ____72,000
__1,368,000 P16,632,000
Problem III 1. • Contributions of cash by the operators Cash KK Company Cerise Company Contribution by joint operators.
360,000 180,000 180,000
• Use of cash and loan to buy machinery & equipment and raw materials Machinery and equipment 96,000 Cash Loans payable – machinery and equipment Contribution by joint operators.
Materials Accounts payable Acquisition of materials. • Labor incurrence Payroll Cash Accrued payroll Annual labor. • Loans from the bank Cash Bank loans payable Amount borrowed.
60,000 36,000
78,000 78,000
86,400 84,000 2,400
72,000 72,000
machinery and equipment and other factory expenses • Repayment of loan – machinery Loan payable – machinery and equipment 12,000 Cash Partial payment of loan. Accounts payable Cash Payment of trade creditors. Factory overhead control – heat, light and power Cash Payment of manufacturing expenses such as heat, light and power. • Depreciation of machinery and equipment Factory overhead control – depreciation Accumulated depreciation Depreciation of equipment.
12,000
50,400 50,400
156,000 156,000
9,600 9,600
• Transfer of materials, labor and overhead to Work-in-Process Work-in-process Payroll Materials Factory overhead control – heat, light and power Factory overhead control – depreciation Allocation of costs to work-in-process • Transfer of Work -in-Process to Finished Goods Inventory. Finished goods Work-in-process Allocation to finished goods
309,600 86,400 57,600 156,000 9,600
216,000 216,000
• Transfer of Finished Goods Inventory to Joint Operators throughout the year KK Company 96,000 DD Company 96,000 Finished goods Delivery of output to joint operators.
192,000
2. Contribution – Drei Contribution – Cerise Bank loan
Balance, 12/31/x4
180,000 180,000 60,000
Cash 60,000 84,000 12,000 50,400 156,000
Machinery and equipment Labor Machinery and equipment Accounts payable Factory overhead control
57,600
Work-in-Process Labor 86,400 216,000 Materials 57,600 Factory Overhead – heat, etc. 156,000 Factory Overhead – depreciation 9,600 Balance, 12/31/x4 93,600
to Finished Goods
3. a. Total assets, P282,000 b. KK’s investment, P84,000 c. DD’s investment, P84,000 December 31, 20x4 Assets Current Assets Cash Finished goods inventory Work-in-Process inventory Materials inventory Total current assets Non-current Assets Equipment Less: Accumulated depreciation Total Assets
P 57,600 24,000 93,600 20,400 P 195,600 P 96,000 9,600
86,400 P282,000
Liabilities and Net Assets Current Liabilities Accrued payroll Accounts payable Non-current Liabilities Bank loan payable Loan payable – machinery and equipment Total Liabilities Net Assets Total Liabilities and Net Assets Joint Operator’s Equity KK Company: Contributions – January 1, 20x4 Cost of inventory distributed
DD Company: Contributions – January 1, 20x4 Cost of inventory distributed Total Joint Operator’s Equity
P
2,400 27,600
P 60,000 24,000
P 180,000 ( 96,000) P 180,000 ( 96,000)
P 30,000
__84,000 P 114,000 168,000 P282,000
P 84,000
P 84,000 P168,000
Problem IV AACompany accounts for its interest in joint operation as follows: January 1, 20x5, Shell Company records its interest in the joint operation, the asset cash being distinguished as an asset in a joint operation by the use of (JO): Cash in Joint Operation (JO). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,750,000 6,750,000
Contribution of cash to joint operations.
On December 31, 20x5, the joint operation has used the cash to purchase various assets, obtain loans, produce inventory and incur expenses. As a joint contributor of 50% of the cash into the joint operation, Shell Company is entitled t o 50% of all the assets, liabilities, expenses and output of the joint operation. From the balance sheet of the joint operation, it should be noted on the following items: Net assets of the joint operation (P12,915,000 – P5,715,000)……..P 7,200,000 900,000 Inventory…………………………………………………………………… From the costs incurred information, it can be seen that the joint operation generated P7,200,000 worth of inventory. If only P900,000 is still on hand in the joint operation, then P6,300,000 worth of inventory must have been transferred to each joint operators of P3,150,000. The eventual transfer of inventory to the joint operators, the joint operation decreases the inventory balance and also decreases the equity contribution (net assets) of the joint operators. The contributions section of the balance sheet of the joint operation at the end of the period, after the transfer of inventory, is as follows (refer to the balance sheet above): Shell Company initial contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Inventory transferred. . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Petron Company initial contribution . . . . . . . . . . . . . . . . . . . . . . . . . ... Less: Inventory transferred. . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 6,750,000 __3,150,000 P6,750,000 __3,150,000
P 3,600,000 _ 3,600,000 P 7,200,000
On December 31, 20x5, Shell Company makes the following entry in its records to replace “Cash in JO” with a 50% share of each of the accounts — assets and liabilities — in the balance sheet of the joint operation. 2. P5,805,000. The entry also recognizes the inventory of P3,150,000 transferred to Shell Company from the joint operation. Finished goods inventory in JO (P900,000 x 50% . . . . . . . . .. . . . . . Work-in-Process inventory in JO (P2,925,000 x 50%). . . . . . . . . . . . . . Materials inventory in JO (P450,000 x 50%). . . . . . . . . . . . . . . . . . . . . . Heavy Machineries in JO (P6,750,000 x 50%) . . . . . . . . . . . . . . . . . . . Finished goods inventory (P6,300,000 x 50%). . . . . . . . . . . . . . . . . . . . Accounts payable in JO (P675,000 x 50%) . . . . . . . . . . . . . . . . . . Accrued payroll in JO (P540,000 x 50%). . . . . . . . . . . . . . . . . . . . Loans payable in JO (P4,500,000 x 50%). . . . . . . . . . . . . . . . . . . . . Cash in JO [P6,750,000 – (P1,890,000 x 50%] . . . . . . . . . . . . .
450,000 1,462,500 225,000 3,375,000 3,150,000 337,500 270,000 2,250,000 5,805,000
Note that Shell Company ’s share of cash in the joint operation is calculated by finding the difference between the share at the beginning of the period, the initial contribution in this example, and the share at the end of the period. Problem V 1. The joint operator, Entity A account for their interests in the joint operation as follows: Entity X — in 20x4
Profit or loss (construction costs) Cash/Accumulated depreciation/Trade payables To recognize the construction costs incurred in 20x4
4,800,000
Cash Profit or loss (construction revenue) To recognize the construction costs incurred in 20x4
8,400,000
4,800,000
8,400,000
Entity Y — in 20x4 Profit or loss (construction costs) Cash/Accumulated depreciation/Trade payables To recognize the construction costs incurred in 20x4
7,200,000
Cash Profit or loss (construction revenue) To recognize the construction costs incurred in 20x4
8,400,000
7,200,000
8,400,000
Problem VI The joint operator, Entity K account for their interests in the joint operation as follows:
January 1, 20x4 (P12,000,000 / 5 = P2,400,000) Property, plant and equipment (interest in an aircraft) Cash To recognize the purchase of an ownership-interest in a jointly controlled aircraft.
2,400,000 2,400,000
In 20x4 Cash Profit or loss (rental income) To recognize income earned in renting to others the use of the aircraft in 20x4.
12,000 12,000
Profit or loss (aircraft operating expenses) Cash To recognize the costs of running an aircraft in 20x4.
180,000
Profit or loss (depreciation expense) Accumulated depreciation (interest in an aircraft To recognize depreciation of an ownership-interest in a jointly controlled aircraft in 20x4: P12,000,000/20 years = P600,000/5 operators = P120,000 share for each joint operator.
120,000
180,000
120,000
Problem VII 1. The following are the summaries of the above transactions for a joint operation in the form of a partnership:
Event a. b. c. d. e. f. * NI** Cash*** Settlement Totals
Investment in Joint Operation Dr. Cr. P 12,000 120,000 6,000 180,000 P588,000
AA Dr.
BB Cr. P12,000 120,000
Dr.
CC Cr.
Dr.
Cr.
P 6,000 120,000 P204,000 3,600
P60,000 P312,000 3,600
________ P318,000 _297,000 P597,000
6,000 ___3,000 P597,000 ________ P597,000
___3,000 P210,600 ________ P210,600
________ P252,000 __112,200 P364,200
________ P315,600 ________ P315,600
______ P 60,000 _147,000 P195,000
P72,000 3,600 6,000 _______ P81,600 _______ P81,600
_______ P597,000
________ P597,000
_153,600 P364,200
________ P364,200
________ P315,600
_120,600 P315,600
_______ P81,600
10,800 _______ P 16,800 31,800 P48,600
_33,000 P81,600
* purchases, P300,000; cost of goods sold, P294,000; ending inventory P6,000 x 50% = P3,000.
**NI – Net Income Allocation AA
BB
CC P 3,000
Allowance for cleaning-up operations Commission: Aljon: 40% of P204,000 P81,600 Elerie: 40% of P312,000 P124,800 Mac: 40% of P72,000 28,800 Balance (75%: 25%) 30,600 10,200 _______ Total P112,200 P135,000 P31,800 **Total credits of P597,000 – Total debits of P318,000 = P279,000, net income.
Total P 3,000 81,600 124,800 28,800 40,800 P279,000
2. The cash settlement entry (refer to No. 1 for the computation of settlement) would be as follows: AA, capital 153,600 BB, capital 120,600 CC, capital 33,000 Therefore, BB will pay P120,600 and CC will pay, P33,000 to AA as final settlement for the joint operations. Problem VIII 1. Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4 Cost of investment Consideration transferred Less: Book value of stockholders’ equity of Son: Common stock (P3,600,000 x 30%) Retained earnings (P1,080,000 x 30%) Allocated excess (excess of cost over book value) Less: Over/under valuation of assets and liabilities: Increase in inventory (P240,000 x 30%) Increase in land (P960,000 x 30%) Increase in building (P600,000 x 30%) Decrease in equipment (P840,000 x 30%) Increase in bonds payable (P120,000 x 30%)
P2,016,000 P 1,080,000 324,000
72,000 288,000 180,000 ( 252,000) ( 360,000)
1,404,000 P 612,000
P
Positive excess: Goodwill (excess of cost over fair value)
P 360,000
The over/under valuation of assets and liabilities are summarized as follows: AA Co. AA Co. Book value Fair value Inventories (sold in 20x4) P1,200,000 P1,440,000 Land 1,080,000 2,040,000 Buildings – net ( 10 year remaining life) 1,800,000 2,400,000 Equipment – net ( 7 year remaining life) 1,440,000 600,000 Bonds payable (due January 1, 20x9) ( 1,200,000) (1,320,000) Net P4,320,000 P5,160,000 A summary or depreciation and amortization adjustments is as follows: Over/ 30% Account Adjustments to be amortized Under thereof Inventories (sold in 20x4) P 240,000 P 72,000 Land 960,000 288,000 Buildings – net ( 10 year remaining life) 600,000 180,000 Equipment – net ( 7 year remaining life) ( 840,000) ( 252,000) Bonds payable (due January 1, 20x9) ( 120,000) ( 36,000) Net P 840,000 P 252,000
252,000
Life 1 10 7 5
(Over) Under Valuation P 240,000 960,000 600,000 ( 840,000) ( 120,000) P 840,000
Current Year(20x4) P 72,000 18,000 (36,000) ( 7,200) P 46,800
2. The following are entries recorded by the parent in 20x4 in relation to its investment in joint venture: January 1, 20x4: (1) Investment in AA Company 2,016,000 Cash 2,016,000
Acquired 30% joint control in AA Company.
January 1, 20x4 – December 31, 20x4: (2) Cash Investment in AA Company (P720,000 x 30%) Record dividends from AA Company. December 31, 20x4: (3) Investment in AA Company Investment income (P1,440,000 x 30%) Record share in net income of AA Company. December 31, 20x4: (4) Investment income Investment in AA Company……………………. Record amortization of allocated excess of inventory, equipment, buildings and bonds payable.
216,000 216,000
432,000 432,000
46,800 46,800
3. Thus, the investment balance and investment income in the books of SS Company (the Joint Venturer ) is as follows:
Cost, 1/1/x4 NI of AA (1,440,000 x 30%) Balance, 12/31/x4
Amortization
Investment in Joint Venture ( AA Company) 2,016,000 216,000 Dividends – Son (720,000x 80%) 46,800 Amortization 432,000 2,185,200 Investment Income 46,800 432,000 385,200
NI of AA (P1,440,000 x 30%) Balance, 12/31/x4
To check the balance of Investment in Joint Venture (AA Company): AA Company’s Stockholders’ Equity, 12/31/20x4: Common stock Retained earnings Retained earnings,1/1/20x4 P 1,080,000 Net income – 20x4 1,440,000 Dividends – 20x4 ( 720,000) Book value of stockholders’ equity of AA Company,12/31/20x4 Multiplied by: Interest in Joint Venture Book value of Interest in Joint Venture Add: Unamortized allocated excess – 30% thereof P252,000 – P46,800, amortization) Goodwill Investment in Joint Venture (AA Company) – equity method
P3,600,000
1,800,000 P5,400,000 30% P1,620,000 205,200 360,000 P2,185,200
Problem IX 1. Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4 Cost of investment Consideration transferred Less: Book value of stockholders’ equity of Son: Common stock (P3,600,000 x 30%) Retained earnings (P1,080,000 x 30%) Allocated excess (excess of cost over book value) Less: Over/under valuation of assets and liabilities: Increase in inventory (P240,000 x 30%) Increase in land (P960,000 x 30%) Increase in building (P600,000 x 30%) Decrease in equipment (P840,000 x 30%) Increase in bonds payable (P120,000 x 30%)
P2,016,000 P 1,080,000 324,000
72,000 288,000 180,000 ( 252,000) ( 360,000)
1,404,000 P 612,000
P
Positive excess: Goodwill (excess of cost over fair value)
252,000 P 360,000
The over/under valuation of assets and liabilities are summarized as follows: AA Co. AA Co. Book value Fair value Inventories (sold in 20x4) P1,200,000 P1,440,000 Land 1,080,000 2,040,000 Buildings – net ( 10 year remaining life) 1,800,000 2,400,000 Equipment – net ( 7 year remaining life) 1,440,000 600,000 Bonds payable (due January 1, 20x9) ( 1,200,000) (1,320,000) Net P4,320,000 P5,160,000 A summary or depreciation and amortization adjustments is as follows: Over/ 30% Account Adjustments to be amortized Under thereof Inventories (sold in 20x4) P 240,000 P 72,000 Land 960,000 288,000 Buildings – net ( 10 year remaining life) 600,000 180,000 Equipment – net ( 7 year remaining life) ( 840,000) ( 252,000) Bonds payable (due January 1, 20x9) ( 120,000) ( 36,000) Net P 840,000 P 252,000
Life 1 10 7 5
(Over) Under Valuation P 240,000 960,000 600,000 ( 840,000) ( 120,000) P 840,000
Current Year(20x4) P 72,000 18,000 (36,000) ( 7,200) P 46,800
2. Correction: instead of “does not prepare” it should be “does prepare” When the cost model is used, only two journal entries are recorded by SS Company during 20x4 related to its investment in AA Company. Entry (1) records San Company’s purchase of AA Company’s stock, entry (2) recognizes dividend income based on the P216,000 (P720,000 x 30%) of dividends received during the period. January 1, 20x4: (1) Investment in SS Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,016,000 2,016,000
Acquired 30% joint control in AA Company.
January 1, 20x4 – December 31, 20x4: (2) Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend income (P720,000 x 30%) . . . . . . . . . . . . . . . . . . . . . . Record dividends from SS Company.
216,000 216,000
On the books of SS Company, the P720,000 dividend paid was recorded as follows: Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends paid by AA Company
720,000 720,000
The dividends paid (or declared) account is a temporary account that is closed to retained earnings at year-end. An alternative is to debit retained earnings directly when dividends are paid or declared. No entries are made on the parent’s books to depr eciate, amortize or write-off the portion of the allocated excess that expires during 20x4.
3. Thus, the investment balance and dividend income in the books of SS Company (the Joint Venturer) is as follows: Cost, 1/1/x4
Balance, 12/31/x4
Investment in Joint Venture (AA Company) 2,016,000
2,016,000 Dividend Income
216,000 216,000
Dividend of AA (P720,000 x 30%) Balance, 12/31/x4
4. Investment in AA Company, P2,185,200 Dividend income, P0 Investment income, P385,200 Incidentally, the following entries are needed to arrive at the balances presented above: Consolidation Workpaper The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet eliminating entries on January 1, 20x4: December 31, 20x4: (1) Investment in AA Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment income (P1,440,000 x 30%) . . . . . . . . . . . . . . . . . . .
432,000 432,000
Record share in net income of AA Company.
December 31, 20x4: (2) Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in AA Company . . . . . . . . . . . . . . . . . . . . . . . . .
46,800 46,800
Record amortization of allocated excess of inventory, equipment, buildings and bonds payable.
December 31, 20x4: (3) Dividend income (P720,000 x 30%) . . . . . . . . . . . . . . . . . . . . . . . . . Investment in AA Company . . . . . . . . . . . . . . . . . . . . . . . . .
216,000 216,000
Adjustment for dividend paid by AA Company.
Thus, the investment balance and dividend income in the consolidated financial statement is as follows: Balance, 12/31/x4 (1) NI of AA (1,440,000 x 30%) Balance, 12/31/x4
Investment in Joint Venture (AA Company) 2,016,000 216,000 (2) Amortization 46,800 (3)Dividends – AA Company 432,000 (600,000 x 30%)
2,185,200
(3) Adjustment
Dividend Income 216,000 216,000 12/31/x4 Balance
0
Amortization
0
12/31/x4
Investment Income 46,800 432,000 385,200
NI of AA Company (P1,440,000 x 30%) Balance, 12/31/x4
Problem X – refer to Problem VIII and IX 1. P2,185,000 2. P385,200
Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4 Cost of investment Consideration transferred Less: Book value of stockholders’ equity of Son: Common stock (P3,600,000 x 30%) Retained earnings (P1,080,000 x 30%) Allocated excess (excess of cost over book value) Less: Over/under valuation of assets and liabilities: Increase in inventory (P240,000 x 30%) Increase in land (P960,000 x 30%) Increase in building (P600,000 x 30%) Decrease in equipment (P840,000 x 30%) Increase in bonds payable (P120,000 x 30%)
P2,016,000 P 1,080,000 324,000 P 72,000 288,000 180,000 ( 252,000) ( 360,000)
1,404,000 612,000
P
Positive excess: Goodwill (excess of cost over fair value)
252,000 P 360,000
The over/under valuation of assets and liabilities are summarized as follows: AA Co. Book value P1,200,000 1,080,000 1,800,000 1,440,000 ( 1,200,000) P4,320,000
Inventories (sold in 20x4) Land Buildings – net ( 10 year remaining life) Equipment – net ( 7 year remaining life) Bonds payable (due January 1, 20x9) Net
AA Co. Fair value P1,440,000 2,040,000 2,400,000 600,000 (1,320,000) P5,160,000
(Over) Under Valuation P 240,000 960,000 600,000 ( 840,000) ( 120,000) P 840,000
A summary or depreciation and amortization adjustments is as follows:
Account Adjustments to be amortized Inventories (sold in 20x4) Land Buildings – net ( 10 year remaining life) Equipment – net ( 7 year remaining life) Bonds payable (due January 1, 20x9) Net
P
( ( P
Over/ Under 240,000 960,000 600,000 840,000) 120,000) 840,000
30% thereof P 72,000 288,000 180,000 ( 252,000) ( 36,000) P 252,000
Life 1 10 7 5
Current Year(20x4) P 72,000 18,000 (36,000) ( 7,200) P 46,800
The investment balance and dividend income in the consolidated financial statement is as follows: Balance, 12/31/x4 (1) NI of AA (1,440,000 x 30%) Balance, 12/31/x4
Amortization
Investment in Joint Venture (AA Company) 2,016,000 216,000 (2) Amortization 46,800 (3)Dividends – AA Company 432,000 (600,000 x 30%)
2,185,200 Investment Income 46,800 432,000 385,200
NI of AA Company (P1,440,000 x 30%) Balance, 12/31/x4
Problem XI 1. Fair value of equipment transferred to JK Company…………………………………. Carrying amount of equipment on J Company’s books………………………………… Unrealized gain on transfer to JK Company…………………………………………….
P 420,000 __120,000 P 300,000
2. A Company’s journal entry to record the initial investment on January 1, 20x4 is as f ollows: Investment in JK Company…………………………………………….. Equipment………………………………………………………………….. Unrealized gain – contra account……………………………………..
420,000 120,000 300,000
Using the equity method of accounting, J Co. will record its 40% share of the yearly net incomes or losses reported by JK Company.; in addition, it will recognize the unrealized gains in income over the life of the equipment. The December 31, 20x4, entries are as follows: Investment in JK Company…………………………………………….. Investment income from JK Co mpany (40% x P122,400)……..
48,960
Unrealized gain – contra account (P300,000/10)………………………. Gain on transfer of equipment to JK Company………………..
30,000
48,960
30,000
This method of recognizing the gain from investing will be repeated over the next nine years, unless JK Company sells this equipment before that period expires. If it does, J Co. will immediately take the balance in the unrealized gains account into income. 3. P30,000 – refer to No. 2 for computation 4. P30,000 – refer to No. 2 for computation Problem XII 1. Unrealized gain, P120,000 – refer to No. 2 for computation Realized gain, P180,000 – refer to No. 2 for computation
2. J Co.’s journal entry to record the initial investment on January 1, 20x4, is as follows: Investment in JK Company…………………………………………….. Equipment………………………………………………………………….. Gain on sale of equipment…………………………………………….. Unrealized gain – contra account……………………………………..
420,000
Note: J Co. recognizes a gain of P10,000, which is the portion of the gain deemed sold to outsiders.
120,000 180,000 120,000
The December 31, 20x4, entries are as follows: Investment in JK Company…………………………………………….. Investment income from JK Co mpany (40% x P122,300)……..
48,960
Unrealized gain – contra account (P12 0,000/10)………………………. Gain on transfer of equipment to JK Company………………..
12,000
48,960
12,000
Note: J portion of the unrealized gain is taken into income each year.
This method of recognizing the gain from investing will be repeated over the next nine years, unless JK Company sells this equipment before that period expires. If it does, J Co. will immediately take the balance in the unrealized gains account into income. 3. P192,000 = P180,000 + P12,000 (refer to No. 2 for computation) Problem XIII 1. Sales proceeds……………………………………………………………………………………. Carrying amount of equipment on sold (P78,000/P420,000 x P120,000)…………….. Immediate gain from selling equipment to K Inc.………………………………………….
P 78,000 __ 22,285 P 55,715
Note: J gain is recognized for the portion (P78,000/P420,000) of the equipment deemed to be sold.
2. P244,285 A Company’s January 1, 20x4, journal entry to record the investment of equipment and the receipt of cash would be as follows: Cash……………………………………………………………………………... Investment in JK Company…………………………………………….. Equipment………………………………………………………………….. Gain on transfer of equipment to JK Company……………….. Unrealized gain – contra account……………………………………..
78,000 342,000 120,000 55,715 244,285
3. P24,428 The December 31, 20x4, entries are as follows: Investment in JK Company…………………………………………….. Investment income from JK Co mpany (40% x P122,400)……..
48,960
Unrealized gain – contra account (P244,285/10)………………………. Gain on transfer of equipment to JK Company………………...
24,428
48,960
24,428
Assuming on December 31 year-end, the P80,143 (P55,715 + P24,428) gain on transfer of equipment to JK Company. will appear in J Co’s 20x4 income statement. The unamortized balance of the J’s share of the unrealized gain of P219,857 (P244,285 – P24,428) will be offset against the investment account. 4. P80,143 = P55,715 (refer to No. 2) + P24,428 (refer to No. 3) Problem XIV 1. The allocation of the cash between sale proceeds and r eturn of equity is made as follows: Sales proceeds: From K Inc.’s investment in JK Company……………………………. From borrowings of JK Company……………………………………... KInc.’s proportion……………………………………………………………. Return of equity to J Company: From K Inc.’s investment in JK Company……………………………. J Company’s proportion of JK borrowings…………………………. Total cash received…………………………………………………………….
P 78,000 P 12,000 __ 60%
P 12,000 __ 40%
__ 7,200 P 85,200
___4,800 P 90,000
Note: When some of the cash received by J Co. comes from joint venture borrowings, only K Co.s share of the cash borrowed is considered proceeds from the sale of equipment.
2. P60,857 The gain from selling is computed as follows: P 85,200 __24,343 P 60,857
Sales proceeds……………………………………………………………………………………. Carrying amount of assets sold (P85,200/P420,000) x P120,000………………………..... Immediate gain from selling equipment to K Inc.…………………………………………..
3. P239,143 J Company’s January 1, 20x4, journal entry would be as follows: Cash……………………………………………………………………………... Investment in JK Company…………………………………………….. Equipment………………………………………………………………….. Gain on transfer of equipment to JK Company……………….. Unrealized gain – contra account……………………………………..
90,000 330,000 120,000 60,857 239,143
Note: The realized gain is based on the portion of the equipment deemed to be sold to the other venturers.
4. P23,914 The December 31, 20x4, entries are as follows: Investment in JK Company…………………………………………….. Investment income from JK Co mpany (40% x P122,400)……..
48,960
Unrealized gain – contra account (P239,143/10)……………………. Gain on transfer of equipment to JK Company………………..
23,914
48,960
23,914
5. P84,771 = P60,857 (refer to No. 3) + P23,914 (refer to No. 4) Multiple Choice Problems 1. b Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenue from Pipeline (30% x P23,100,000) . . . . . . . . . . . . . . . . . . .
6,930,000 6,930,000
2. c – P4,200,000 + P1,050,000 The share of L Inc. in net income of the joint operations would be as follows:
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization expense: P21,000,000 ( 30%) / 20 years. . . . . . . . P70,000,000 (100%) / 20 years. . . . . . . . Net Income of the Joint Operation. . . . . . . . . . . . . . . . . . . . . . . . . . . . Multiplied by: 30% interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Income of L. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proportionate Total (100% Share (30%) based) P 6,930,000 P23,100,000 4,200,000 14,000,000 1050,000 _3,500,000 P 5,600,000 __________ ______30% P 1,680,000 P 1,680,000
3. a – refer to No. 2 above 4. b The following journal entries would be recorded: Pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Steel Pipes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on steel pipes (70%* of gain). . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain – contra account (30% of gain, P5,600,000) . . . .
21,000,000 15,400,000 3,920,000 1,680,000
The following should be observed in relation to t he above journal entry: • L should recognize a gain of P3,920,000 [70% x (P21,000,000 – P15,400,000)]*
•
A portion of the gain can be recognized on the contribution of assets to a joint operation. PFRS 11 indicates the following: When an entity enters into a transaction with a joint operation in which it is a joint operator, such as a sale or contribution of assets, it is conducting the transaction with the other parties to the joint operation and, as such, the joint operator shall recognize gains and losses resulting from such a transaction only to the *extent of the other parties’ interests in the joint operation. When such transactions provide evidence of a reduction in the net realizable value of the assets to be sold or contributed to the joint operation, or of an impairment loss of those assets, those losses shall be recognized fully by the joint operator.
5. c – refer to No. 4 6. c – (P1,050,000 – P84,000) A gain can be recognized when the significant risks and rewards have been transferred. Pipeline operating expenses (30% x P14,000,000). . . . . . . . . . . . . . . . . Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenue from Pipeline (30% x P23,100,000) . . . . . . . . . . . . . . . . . . .
4,200,000 4,200,000 6,930,000 6,930,000
Amortization expense – pipeline (P21,000,000/20 years). . . . . . . . . . . Accumulated depreciation - pipeline. . . . . . . . . . . . . . . . . . . . . . .
1,050,000
Unrealized gain – contra account (P1,680,000/ 20 years). . . . . . . . . . Amortization expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
84,000
1,050,000
84,000
•
The joint operator’s own interest in the gain is recognized over the life of the asset.
•
The unrealized gain is a contra account to the pipeline account; it should not be reported as a deferred gain on the liability side of the balance sheet. When L Inc., prepares a balance sheet, the unrealized gain will be offset against the pipeline such that the pipeline’s net cost is P19,404,000 (P21,000,000 – {P1,680,000 – P84,000})). As the net cost of the pipeline is being amortized, the unrealized gain account is also being amortized. In effect, the unrealized gain is being brought into income over the life of the pipeline. As the pipeline is being used to generate revenue on transactions with outsiders, the operator’s own share of the unrealized gain is being recognized in net income. This is similar to what happened in Chapter 18 (Intercompany Sales of Property and Equipment) of Volume II, when the unrealized profits from an intercompany sale of a depreciable asset were realized over the life of the depreciable asset.
7. c
Incidentally, the share of L Inc. in net income of the joint operation would be as follows: Revenue (30% x P23,100,000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Operating expenses (30% x P14,000,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization expense: P70,000,000 x 30% = P21,000,000 / 20 years. . . . . . . . . . . Add: Gain on steel pipes [70%* x (P21,000,000 – P15,400,000)] . . . . . . . . . . . . . . . . . Realized gain – amortization**(P1,680,000/20 years). . . . . . . . . . . . . . . . . . . . . . . Net Income of L. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 6,930,000 4,200,000 1,050,000 3,920,000 _____84,000 P 5,684,000
* PFRS 11 states that: “When an entity enters into a transaction with a joint operation in which it is a joint operator, such as a sale or contribution of assets, it is conducting the transaction with the other parties to the joint operation and, as such, the joint operator shall recognize gains and losses resulting from such a transaction only to the *extent of the other parties’ interests in the joint operation .” ** Sales price of P21,000,000 – P15,400,000, cost of steel pipes = P5,600,000 x 30% = P1,680,000
8. b Contribution – XX Contribution – YY Bank loan
Balance, 12/31/x4
Cash 252,000 84,000 Machinery and equipment 252,000 117,600 Labor 84,000 16,800 Machinery and equipment 70,560 Accounts payable 218,400 Factory overhead control 80,640
9. b Work-in-Process Labor 120,960 302,400 Materials 80,640 Factory Overhead – heat, etc. 218,400 Factory Overhead – depreciation 13,440 Balance, 12/31/x4 131,040 10. c December 31, 20x4 Assets Current Assets Cash Finished goods inventory Work-in-Process inventory Materials inventory Total current assets Non-current Assets Equipment Less: Accumulated depreciation Total Assets Liabilities and Net Assets Current Liabilities Accrued payroll Accounts payable Non-current Liabilities Bank loan payable Loan payable – machinery and equipment Total Liabilities Net Assets Total Liabilities and Net Assets
to Finished Goods
P 80,640 33,600 131,040 28,560 P 273,840 P 134,400 13,440
P
3,360 38,640
P 84,000 33,600
120,960 P394,800
P 42,000
__117,600 P 159,600 _235,200 P 394,800
11. a Joint Operator’s Equity XX Company: Contributions – January 1, 20x4 Cost of inventory distributed
YY Company: Contributions – January 1, 20x4 Cost of inventory distributed Total Joint Operator’s Equity
P 252,000 ( 134,400)
P 252,000 ( 134,400)
P 117,600
P 117,600 P235,200
12. 13. 14. 15. 16. 17. 18.
d a c – [ P50,000 – (P20,000 + P40,000) + P45,000] = P35,000 a a b – (P1,200,00/5 years = P240,000 x 50% share = P120,000) d The entry in the records of joint operator Two (50%) is: Cash in JO (50% x P50,000)………………………………………………25,000 Building in JO at book value since he is the contributor * (50% x P40,000)……………………………………………………………20,000 Building, cost…………………………………………………………. Gain on sale of building [(P50,000 – P40,000) x 50%] ……..……
40,000 5 000
* but the other joint operator (One) should debit the asset at fair value, thus the entry for the building and cash contributed by joint operator One should be: Building in JO at fair value (50% x P50,000) ………………… 25,000 Cash in JO (50% x P50,000)…………………………………… 25,000 Cash…………………………………………………….. 50,000 19. d – P300,000 x 1/3 share = P100,000 20. d 21. b The in the records of joint operator AA (60%) in relation to Plant Assets is: Plant Assets in JO at fair value (60% x P90,000) ……………………… 54,000 ?? ?? ?? ?? 18,000 Gain on sale of building……………………………………… 90,000 Plant Assets at book value…………………………………… 22. c The entry in the records of joint operator BB (40%) is: Plant Assets in JO at fair value (40% x P120,000) ……………………… 48,000 Obligation to JO at book value (for services) since he is the contributor (60%* x P65,000)…………………………… 39,000 Gain on Provision of Services [60%* x (P80,000 – P65,000)] 9,000 * it represents his share as an obligation for his services he will render in the future.
23. c 24. b – the question is NOT for part of Abel’s entry, best answer is b. Joint Operator Abel Joint Operator Cain Cash in JO Bldg in JO, at BV (50% x 500,000) Building at book value Gain on sale of building [(P1,000,000 – P500,000) x 50%
500,000 250,000 500,000 250,000
Cash in JO (50% x P2M)* Cash in JO (50% x P1M)* Building at FV (50% x P1M) Cash *or debit P1,500,000.
1,000,000 500,000 500,000 2,000,000
25. b – refer to No. 24 26. a – Work in progress: P650,000 x 50%.......................................................................P 325,000 Finished goods inventory…………………………………………………………… 100,000 P 425,000
26. c MM P9,800,000 5,600,000 P4,200,000
Construction revenue Less: Construction costs Net income
NN P9,800,000 8,400,000 P1,400,000
27. c – refer to No. 26 28. a Rental income Less: Aircraft operating expenses Depreciation expense Net income
P532,000 210,000 _140,000 P182,000
Property, plant and equipment Less: Accumulated depreciation Net book value
P2,800,000 __ 140,000 P2,660,000
29. a
30. a Books of X Inv. in JO
4,000 6,500 2,500 Books of Y Inv. in JO
2,500 4,000
6,500
Books of Z Inv. in JO
2,500 4,000
X, capital 2,500
Journal entry for settlement should be: Z , capital……………………….. 6,500 X , capital…………………… 2,500 Y , capital…………………… 4,000
Y. capital 4,000
Z, capital 6,500
6,500 31. a Total credits - Investment in Joint Operations…………………………………P 25,810 Total debits - Investment in Joint Operations…………………………………. 19,750 Net income or total gain (credit balance)…………………………………….P 6,060 32. d Jose, capital 8,500 investment 1,212 share in net income (P6,060 x 2/10) 9,712 33. a – The 20,000 shares should be valued at market value, thus, P800,000 (20,000 shares x P40 per share)
34. b Jose, capital P800,000 P 198,000 (4,500 x P44) – Sales 3,000 125,000 (5,000 x P25) 4,700 13,600* (13,600 x P1) - Cash dividend 168,000 (6,000 x P28) - Sales 266,000 (7,600 x P35) P807,700 P 770,600 P 37,100
20,000 shares at P40/share Expenses
Joint operation loss *
9/30 Shares issued (6,000 + 10,000 + 4,000) 10/20 Sold 11/ 1 Stock dividend (20,000 – 4,500) x 20% 11/15 Sold Balance of shares outstanding before cash dividend
20,000 (4,500) 3,100 (5,000) 13,600
Therefore, Roxas share would be P11,130 (P37,100 x 6 ,000/20,000 shares) 35. c Share in net loss P37,100 x (10,000/20,000)
Investment in Joint Operations P400,000 Investment (10,000 shares x P40) P18,550 P381,450
36. b Unrealized loss due to decline in the value of shares at the time of investment (P62 – P40) x 4,000 shares Share in joint operation (P37,100 x 4/20) Reduction of loss by cash dividend (P13,600 x 4/20)
P68,000 __7,420 P98,140
37. a Investment in Joint Operations before net income or loss 15,000 25,000 ending inventory 10,000 net income 38. a (A- P10,000 x 50% = P5,000; B – P10,000 x 30% = P3,000; C – P10,000 x 20%) 39. a Purchases Contr/Invest Expenses
Joint Operations 20,000 77,000 Sales (?) 20,000 800 1,800 42,600
Anson, Capital Unsold merchandise 600 20,000 18,600 Profit(50%)
77,000 34,400 (P16,000+ P18,400) 2,800 (P600 + P2,200) Unsold merchandise 37,200 Net profit
600
38,600 38,000 to Alas
40. c – refer to No. 39 computation. 41. a Purchases Freight-in Freight-out
Investment in Joint Operations 10,000 7,200 sales 240 5,120 unsold 260 (P10,000 + P240) x 1/2 10,500 12,320 1,820
Santo, capital 10,000 Contribution/Invest 910 Share in NI 10,910
42. a – refer to No. 41 for computation 43. c Investment in Joint Operations 6,500 3,500 Sales 3,000
before sale Net loss N, capital 1,100 14,500 13,400
O, capital 1,100 6,500 5,400
Distribution of Loss: Salary Balance, equally
M 300 (1,100) P ( 900)
P
N P
(1,100) P(1,100)
O P
(1,100) P(1,100)
Total 300 (3,300) P(3,000)
P
44. a – refer to No. 43 for computation 45. b Revenues Total cash receipts (P78,920 + P65,245) Less: Cash investments (P30,000 + P20,000) Cash sales Add: Proceeds from sale of remaining assets Total Revenue Less: Expenses (P62,275 + P70,695) Net income
P144,345 50,000 P 94,345 60,000 P154,345 132,970 P 21,375
46. c Receipts
Benin, capital 78,920 30,000 Contribution 62,275 Disbursement 12,825 Share in NI (3/5) 78,920 105,100 26,180
Receipts
Sucat, capital 65,425 20,000 Contribution 70,695 Disbursement 8,550 Share in NI (2/5) 65,425 99,245 33,820
47. d N’s books: it shows P5,000 receivable from P, and P3,000 payable to O; thus, N should receive net cash of P2,000: O, capital……………………………………………………………..3,000 Cash……………………………………………………………………2,000 P, capital ……………………………………………………………….5,000
O’s books: it shows P5,000 receivable from P, and P2,000 payable to N; thus, O should receive net cash of P3,000: N, capital ………………………………………………………………2,000 Cash…………………………………………………………………….3,000 P, capital ……………………………………………………………….5,000 P’s books: it shows P2,000 payable to N and P3,000 payable to O; thus, in final settlement, P should pay a total of P5,000; P2,000 and P3,000 to N and O, respectively: N, capital …………………………………………………………….2,000 O, capital……………………………………………………………...3,000 Cash…………………………………………………………………….5,000
48. d The Investment in Basket Co. as of December 31 is as follows: Acquisition cost, January 2 Add (deduct): Share in net income (P100,000 x 30%] Share in dividends Amortization of allocated excess Investment balance on December 31 Cost of investment Less: Book value of interest acquired [30% x P500,000) Allocated excess Less: Over/undervaluation of assets and liabilities: Increase in land (P200,000 x 30%) Goodwill
P 250,000 30,000 ( 0) ( 0) P 280,000 P 250,000 150,000 P 100,000 60,000 P 40,000
Amortization of allocated excess: Identifiable net assets - none 49. b The joint arrangement is a joint venture because it needs unanimous consent to all parties involved. The parties recognize their rights to the net assets of Harrison Company as investments and account for them using the equity method. The Investment in Basket Co. as of December 31 is as follows: Acquisition cost, January 1, 2013 Add (deduct): Share in net income (P90,000 x 40%] Share in dividends (P30,000 x 40%) Amortization of allocated excess Investment balance on December 31 Cost of investment Less: Book value of interest acquired [40% x (P1,400,000 – P500,000)] Allocated excess Less: Over/undervaluation of assets and liabilities: Increase in building (P140,000 x 40%) Increase in trademark (P210,000 x 40)
P 500,000 36,000 ( 12,000) ( 16,400) P 507,600 P 500,000 360,000 P 140,000 56,000 84,000
Amortization of allocated excess: Building: P56,000 / 7 years Trademark: P84,000 / 10 years Total
P
8,000 8,400 P 16,400
50. b – refer to No. 49 for further discussion. The Income from Investment in Basket Co. on December 31 is as follows: Share in net income (P90,000 x 40%] P 36,000 Amortization of allocated excess ( 16,400) Income from Investment on December 31 P 19,600 51. d The joint arrangement is a joint venture because it needs unanimous consent to all parties involved. The parties recognize their rights to the net assets of Harrison Company as investments and account for them using the equity method. The Investment in Goldman Co. as of December 31, 2015 is as follows: Acquisition cost, January 1, 2013 Add (deduct): Share in net income [(P140,000 x 3 years) x 40%] Share in dividends [(P50,000 x 3 years) x 40%] Amortization of allocated excess Investment balance on December 31 Cost of investment Less: Book value of interest acquired (40% x P1,200,000) Allocated excess Less: Over/undervaluation of assets and liabilities Goodwill
P 600,000 168,000 (60,000) ( 0) P 708,000 P 600,000 480,000 P 120,000 0 P 120,000
There is no indication as to impairment of goodwill. 52. c To determine whether a contractual arrangement gives parties control of an arrangement collectively, it is necessary first to identify the relevant activities of that arrangement. That is, what are the activities that significantly affect the returns of the arrangement? When identifying the relevant activities, consideration should be given to the purpose and design of the arrangement. In particular, consideration should be given to the risks to which the joint arrangement was designed to be exposed, the risks the joint arrangement was designed to pass on to the parties involved with the joint arrangement, and whether the parties are exposed to some or all of those risks. In many cases, directing the strategic operating and financial policies of the arrangement will be the activity that most significantly affects returns. Often, the arrangement requires the parties to agree on both of these policies. However, in some cases, unanimous consent may be required to direct the operating policies, but not the financial policies (or vice versa). In such cases, since the activities are directed by different parties, the parties would need to assess which of those two activities (operating or financing) most significantly affects returns, and whether there is joint control over that activity. This would be the case whenever there is more than one activity that significantly affects returns of the arrangements, and those activities are directed by different parties.
Based on the ownership structure, even though Wallace can block any decision, Wallace does not control the arrangement, because Wallace needs Zimmerman to agree — therefore joint control between Wallace and Zimmerman (since their votes and only their votes, together meet the requirement). Because they are the only combination of parties that collectively control the arrangement, it is clear that Wallace and Zimmerman must unanimously agree. The appropriate method for the joint venture is the equity method. The Income from Investment in Gold Co. on December 31, 2015 is as follows: Share in net income (P140,000 x 50%) P 70,000 Amortization of allocated excess ( 0) Income from Investment on December 31, 2015 P 70,000 53. c No joint control — multiple combinations of parties could be used to reach agreement and collectively control the arrangement (i.e., Wallace and Zimmerman or Wallace and American could vote together to meet the requirement). Since there are multiple combinations, and the contractual agreement does not specify which parties must agree, there is no unanimous consent. It should be noted that since there is no joint control as indicated per problem and the presence of 50% ownership holding is presumed to give significant influence of Wallace over Goldman, unless it can be clearly demonstrated that this is not the case. Therefore, Goldman Company is considered as an associate instead of a joint venture. The appropriate method for Investment in Associates is the equity method. The Income from Investment in Gold Co. on December 31, 2015 is as follows: Share in net income (P140,000 x 50%) Amortization of allocated excess Income from Investment on December 31, 2015
P 70,000 ( 0) P 70,000
54. d No joint control – multiple combinations could be used to reach agreement. It should be noted that since there is no joint control as indicated per problem and the presence of 35% ownership holding is presumed to give significant influence of Wallace over Goldman, unless it can be clearly demonstrated that this is not the case. Therefore, Goldman Company is considered as an associate instead of a joint venture. The appropriate method for Investment in Associates is the equity method. The Income from Investment in Gold Co. on December 31, 2015 is as follows: Share in net income (P140,000 x 35%) P 49,000 Amortization of allocated excess ( 0) Income from Investment on December 31 2015 P 49,000 55. d Share in net income (P90,000 x 25%) Amortization of allocated excess Income from Investment on December 31
P 22,500 ( 0) P 22,500
Share in net income (P100,000 x 25%) Amortization of allocated excess Income from Investment on December 31
P 25,000 ( 0) P 25,000
56. d
57. b The Investment in Dover as of December 31 is as follows: Acquisition cost, January 1 Add (deduct): Share in net income (P160,000 x 25%) Share in dividends (P50,000 x 25%] Amortization of allocated excess (P90,000 x 25%) /10 years Investment balance on December 31
P 400,000 40,000 (12,500) ( 2,250) P 425,250
58. a – downstream transaction (refer also to consolidation for corollary analysis) Gross Profit Markup: P36,000/P90,000 40% Inventory Remaining at Year-End P20,000 x: Markup 40% Unrealized profit in ending inventory P 8,000 x: Ownership 30% Intercompany Unrealized profit in ending inventory P 2,400 59. c The Investment in Dover as of December 31 is as follows: Acquisition cost, January 1 Add (deduct): Share in net income (P320,000 x 25%) Share in dividends (P80,000 x 25%] Amortization of allocated excess (P250,000 x 25%) /10 years Investment balance on December 31
P 600,000 80,000 (20,000) ( 6,250) P 653,750
60. b Share in net income (P320,000 x 25%) Amortization of allocated excess Income from Investment on December 31
P 80,000 ( 6,250) P 73,750
61. c – refer to No. 59 computation 62. b – refer to No. 60 for computation 63. c – refer to No. 59 for computation 64. b – refer to No. 60 for computation 65. c – refer to No. 59 for computation 66. b – refer to No. 60 for computation 67. c Fair value of equipment transferred to ST Company…………………………………. Carrying amount of equipment on S Company’s books………………………………… Unrealized gain on transfer to ST Company…………………………………………….
P 490,000 __140,000 P 350,000
68. c – P350,000/10 years = P35,000 69. c – P350,000/10 years = P35,000 70. a S Co.’s journal entry to record the initial investment on January 1, 20x4, is as follows: Investment in ST Company…………………………………………….. Equipment………………………………………………………………….. Gain on sale of equipment…………………………………………….. Unrealized gain – contra account……………………………………..
490,000
Note: S Co. recognizes a gain of P210,000, which is the portion of the gain deemed sold to outsiders.
140,000 210,000 140,000
71. d – P245,000 = P210,000 (refer to No. 70) + P35,000 The December 31, 20x4, entries are as follows: Investment in ST Company…………………………………………….. Investment income from ST Company (40% x P142,800)……..
57,120
Unrealized gain – contra account (P350,000/10)………………………. Gain on transfer of equipment to ST Company………………..
35,000
57,120
35,000
Note: A portion of the unrealized gain is taken into income each year.
72. c Sales proceeds……………………………………………………………………………………. Carrying amount of equipment on sold (P91,000/P490,000 x P140,000)…………….. Immediate gain from selling equipment to T Inc.………………………………………….
P 91,000 __ 26,000 P 65,000
Note: A gain is recognized for the portion (P91,000/P490,000) of the equipment deemed to be sold.
73. d The Company’s January 1, 20x4, journal entry to record the investment of equipment and the receipt of cash would be as follows: Cash……………………………………………………………………………... Investment in ST Company…………………………………………….. Equipment………………………………………………………………….. Gain on transfer of equipment to ST Company……………….. Unrealized gain – contra account……………………………………..
91,000 399,000 140,000 65,000 285,000
74. a The December 31, 20x4, entries are as follows: Investment in ST Company…………………………………………….. Investment income from ST Company (40% x P142,800)……..
57,120
Unrealized gain – contra account (P285,000/10)………………………. Gain on transfer of equipment to ST Company………………...
28,500
57,120
28,500
75. c - on December 31 year-end, the P93,500 (P65,000 + P28,500) gain on transfer of equipment to ST Company will appear in S Co’s 20x4 income statement. The unamortized balance of the S’s share of the unrealized gain of P256,500 (P285,000 – P28,500) will be offset against the investment account. 76. a Sales proceeds: From T Inc.’s investment in ST Company……………………………. From borrowings of ST Company……………………………………... T Inc.’s proportion……………………………………………………………. Return of equity to S Company: From T Inc.’s investment in ST Company……………………………. S Company’s proportion of ST borrowings…………………………. Total cash received…………………………………………………………….
P 91,000 P 14,000 __ 60%
P 14,000 __ 40%
__ 8,400 P 99,400
___5,600 P 105,000
Note: When some of the cash received by S Co. comes from joint venture borrowings, only T Co.s share of the cash borrowed is considered proceeds from the sale of equipment.
77. c The gain from selling is computed as follows: Sales proceeds……………………………………………………………………………………. Carrying amount of assets sold (P99,400/P490,000) x P140,000………………………..... Immediate gain from selling equipment to T Inc.…………………………………………..
P 99,400 __28,400 P 71,000
78. c The Company’s January 1, 20x4, journal entry would be as follows: Cash……………………………………………………………………………... Investment in ST Company…………………………………………….. Equipment………………………………………………………………….. Gain on transfer of equipment to ST Company……………….. Unrealized gain – contra account……………………………………..
105,000 385,000 140,000 71,000 279,000
Note: The realized gain is based on the portion of the equipment deemed to be sold to the other venturers.
79. b The December 31, 20x4, entries are as follows: Investment in ST Company…………………………………………….. Investment income from ST Company (40% x P142,800)……..
57,120
Unrealized gain – contra account (P279,000/10)……………………. Gain on transfer of equipment to ST Company………………..
27,900
57,120
27,900
80. d – P98,900 = P71,000 (refer to No. 77) + P27,900 (refer to No. 79) 81. d – [P100,000 x (25% x P20,000)] = P105,000 82. a – [P100,000 x (25% x P20,000)] = P105,000 – (P200,000 x 25%) – (P250,000 x 25%) = (P7,500) 83. a - [P100,000 x (25% x P20,000)] = P105,000 – (P200,000 x 25%) – (P250,000 x 25%) = (P7,500) + (25% x P16,000) = (P3,500) 84. a Entity KK shall account for its interest in the joint operation as follows: Current assets (50% x P600,000)................................................... Property, plant and equipment (60% x P1,000,000)................ .. Expenses (60% x P600,000)........................................................... Liabilities (75% x P800,000)…………........................................ Revenue (55% x P1,000,000)………….................................... Cash in Joint Operation/Interests in Joint Operation………
300,000 600,000 360,000 600,000 550,000 110,000
85. a - refer to No. 84 for computation The assets, liabilities, revenue and expenses are recognized and combined with those of Entity A’s own financial statements. The interest in joint operations at the end of the reporting period is reduced to P190,000, computed as follows: Cash in Joint Operation/Interests in Joint Operation………………………….. Less: Share in assets, liabilities, revenues and expenses………………………. Cash in Joint Operation/Interest in operation, ending balance…………….
P 300,000 110,000 P 190,000
In a joint operation, the party recognizes these assets and obligations without limitation, even if that results in the liabilities exceeding the assets. In contrast, in a joint venture, a party has an interest in the net assets and that party’s loss is li mited to its investment. When a party has an interest in the net assets and any losses exceed the investment, the losses are not recognized (i.e., the party does not recognize a negative investment). Instead, such losses are recognized only to the extent that the party has a legal or constructive obligation to make payments on behalf of the joint venture. 86. d – refer to No. 85 for computation Share in r evenue……................................................................................ Less: Share in expenses………………………............................................ Share in net income..................................................................................
P 550,000 360,000 P 190,000
Quiz - XI 1. P 2,510
Investment in Joint Operations 45,000 48,700 Sales 18,000 16,800 80 40 Dividend 50 100 63,130 65,640 2,510 2,510 Net income
Purchases Interest expense
McKee, capital 48,700 45,000 40 80 1,225 share in NI 2,405
Nelson, capital 16,800 18,000 100 50 1,225 share in NI 2,405
2. a – refer to No 16 for computation Nelson, capital McKee
2,405 2,405
3. P 300 Investment in Joint Operations 950 800 sales 150 600 1,100 1,400 300 Net income
Purchases Expenses
Bar, capital 800 950 270 800 1,220 420 due to
Due from
Car, capital 600 150 30 600 180 420
The entry for the settlement would be as follows (Car will pay Bar P420): Bar, capital 420 Car, capital 420
Distribution of net income Bar Commission on net purchases: 20% x P950 Commission on sales: 25% x P800 25% x P600 Balance, equally
Car
P190
P190
200
200 150 (240) P300)
(120) P270
P150 (120) P 30
4. b – refer to No. 3 for computations. 5. P 21,000 Investment in Joint Operations 15,000 before P/L
Total
Tan, capital 27,000
Salary – Reyes 12,000
10,500 unsold merchandise 25,500 net income 13,500
unsold merch.
10,500 10,500
4,500 share in NI (1/3 x P13,500) 31,500 21,000
6. P8,316,000 The share of R Inc. in net income of the joint operations would be as follows: Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization expense: P25,200,000 ( 30%) / 20 years. . . . . . . . P84,000,000 (100%) / 20 years. . . . . . . . Net Income of the Joint Operation. . . . . . . . . . . . . . . . . . . . . . . . . . . . Multiplied by: 30% interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Income of R. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proportionate Total (100% Share (30%) based) P 8,316,000 P27,720,000 5,040,000 16,800,000 1,260,000 _4,200,000 P 6,720,000 __________ ______30% P2,016,000 P 2,016,000
7. P P6,300,000 = P5,040,000 + P1,260,000 – refer to No. 6 for further computation 8. P2,016,000 – refer to No. 6 for computation 9. P4,704,000 The following journal entries would be recorded: Pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Metal Sheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on metal sheets (70%* of gain). . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain – contra account (30% of gain, P6,720,000) . . . .
25,200,000 18,480,000 4,704,000 2,016,000
The following should be observed in relation to t he above journal entry: • L should recognize a gain of P4,704,000 [70% x (P25,200,000 – P18,480,000)]* •
A portion of the gain can be recognized on the contribution of assets to a joint operation.
10. P2,016,000 – refer to No. 9 11. P1,159,200 = P1,260,000 – P100,800 Amortization expense – pipeline (P25,200,000/20 years). . . . . . . . . . . Accumulated depreciation - pipeline. . . . . . . . . . . . . . . . . . . . . . .
1,260,000
Unrealized gain – contra account (P2,016,000/ 20 years). . . . . . . . . . Amortization expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100,800
1,260,000
100,800
12. P23,284,800 = P25,200,000 – (P2,016,000 – P100,800) 13. P75,000 Share in net income (P250,000 x 30%) Amortization of allocated excess Income from Investment on December 31 14. P2,071,500 The Investment in Lennon as of December 31 is as follows: Acquisition cost, January 1 Add (deduct): Share in net income (P670,000 x 45%) Share in dividends (P2.50 x 60,000 shares] Amortization of allocated excess Investment balance on December 31 15. P1,609,000
P 75,000 ( 0) P 75,000
P1,920,000 301,500 (150,000) ( 0) P2,071,500
The Investment in Wilton as of December 31 is as follows: Acquisition cost, January 1 Add (deduct): Share in net income (P600,000 + P750,000) x 30% Share in dividends (P200,000 x 2 years x 30%] Amortization of allocated excess (P380,000 / 10 years) x 2 years Investment balance on December 31 Cost of investment Less: Book value of interest acquired [30% x (P6,400,000 – P3,000,000)] Allocated excess Less: Over/undervaluation of assets and liabilities Patents 16. P950,800 The Investment in Wilton as of December 31 is as follows: Acquisition cost, January 1 Add (deduct): Share in net loss (P140,000 x 30%) Share in dividends (P24,000 x 30%] Amortization of allocated excess Investment balance on December 31
P 1,400,000 405,000 (120,000) ( 76,000) P1,609,000 P1,400,000 1,020,000 P 380,000 0 P 380,000
P 1,000,000 ( 42,000) ( 7,200) ( 0) P, 950,800
17. P3,240 = [P24,000 x (P120,000 – P66,000)/P120,000] x 30%
Multiple Choice Problems – SME for Joint Ventures 1. a 6. a 11. a 2. a 7. a 12. c 3. a 8. a 13. a 4. a 9. c 14. a 5. c 10. a 15. b
16. c Cost of investment in entity Z: Purchase price…………………………………………………………………….. P 28,000 Add: Transaction costs (1% x P28,000)……………………………………… 280 Costs…………………………………………………………………………………. P 28,280 Less: Fair value on December 31, 20x 4……………………..................... .P 15,000 Less: Costs to sell (5% x P15,000)…………………………………………….. 750 14,250 Impairment loss……………………………………………………………………….. P 14,030
17. d No entry required only the decrease or i ncrease in fair value is recognized to profit and loss.
18. a Cost of investment in entity Z: Purchase price…………………………………………………………………….. Add: Transaction costs (1% x P28,000)……………………………………… Initial costs………………………………………………………………………….. Less: SME A’s share of entity Z’s loss for the year (25% x P20,000)……...... Costs of investment, December 31, 20x4…………………………………….
P 28,000 280 P 28,280 5,000 P23,280
