Chapter 11 Problem I
1.
• Contributions of cash by the operators
Cash 360,000
KK Company 180,000
Cerise Company 180,000
Contribution by joint operators.
• Use of cash and loan to buy machinery & equipment and raw materials
Machinery and equipment 96,000
Cash 60,000
Loans payable – machinery and equipment 36,000
Contribution by joint operators.
Materials 78,000 Accounts payable 78,000 Acquisition of materials. • Labor incurrence Payroll 86,400 Cash 84,000 Accrued payroll 2,400 Annual labor. • Loans from the bank
Cash 72,000
Bank loans payable 72,000
Amount borrowed.
• Repayment of loan – machinery and equipment and other factory expenses
Loan payable – machinery and equipment 12,000
Cash 12,000
Partial payment of loan.
Accounts payable 50,400
Cash 50,400
Payment of trade creditors.
Factory overhead control – heat, light and power 156,000
Cash 156,000
Payment of manufacturing expenses such as heat, light and power.
• Depreciation of machinery and equipment
Factory overhead control – depreciation 9,600
Accumulated depreciation 9,600
Depreciation of equipment.
Work-in-process 309,600
Payroll 86,400
Materials 57,600
Factory overhead control – heat, light and power 156,000
Factory overhead control – depreciation 9,600
Allocation of costs to work-in-process
• Transfer of Work-in-Process to Finished Goods Inventory.
Finished goods 216,000
Work-in-process 216,000
Allocation to finished goods
• Transfer of Finished Goods Inventory to Joint Operators throughout the year
KK Company 96,000
DD Company 96,000
Finished goods 192,000
Delivery of output to joint operators. 2. 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 P 57,600
Finished goods inventory 24,000
Work-in-Process inventory 93,600
Materials inventory 20,400
Total current assets P 195,600
Non-current Assets
Equipment P 96,000
Less: Accumulated depreciation 9,600 86,400
Total Assets P282,000
Cash
Contribution – Drei 180,000 60,000 Machinery and equipment Contribution – Cerise 180,000 84,000 Labor
Bank loan 60,000 12,000 Machinery and equipment 50,400 Accounts payable
156,000 Factory overhead control Balance, 12/31/x4 57,600
Work-in-Process
Labor 86,400 216,000 to Finished Goods Materials 57,600
Factory Overhead – heat, etc. 156,000 Factory Overhead – depreciation 9,600 Balance, 12/31/x4 93,600
Liabilities and Net Assets Current Liabilities
Accrued payroll P 2,400
Accounts payable 27,600 P 30,000
Non-current Liabilities
Bank loan payable P 60,000
Loan payable – machinery and equipment 24,000 __84,000
Total Liabilities P 114,000
Net Assets 168,000
Total Liabilities and Net Assets P282,000
Joint Operator’s Equity
KK Company: Contributions – January 1, 20x4 P 180,000
Cost of inventory distributed ( 96,000) P 84,000
DD Company: Contributions – January 1, 20x4 P 180,000
Cost of inventory distributed ( 96,000) P 84,000
Total Joint Operator’s Equity P168,000
Problem II
1. Ayala Corp. shall account for its interest in the joint operation as follows:
Current assets (50% x P720,000) 360,000
Property, plant and equipment (60% x P1,200,000) 720,000
Expenses (60% x 720,000) 432,000
Liabilities (75% x P960,000) 720,000
Revenue (55% x P1,200,000) 660,000
Interests in Joint Operation 132,000
To recognize the share of Entity A in the assets, liabilities, revenues and expenses as follows:
2. The assets, liabilities, revenue and expenses are recognized and combined with those of Ayala’s own financial statements. The interest in joint operations at the end of the reporting period is reduced to P228,000, computed as follows:
Interests in Joint Operation P 360,000
Less: Share in assets, liabilities, revenues and expenses 132,000
Interest in operation, ending balance P 228,000
Problem III
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) 4,800,000
Cash/Accumulated depreciation/Trade payables 4,800,000
To recognize the construction costs incurred in 20x4
Cash 8,400,000
Profit or loss (construction revenue) 8,400,000
Entity Y—in 20x4
Profit or loss (construction costs) 7,200,000
Cash/Accumulated depreciation/Trade payables 7,200,000
To recognize the construction costs incurred in 20x4
Cash 8,400,000
Profit or loss (construction revenue) 8,400,000
To recognize the construction costs incurred in 20x4 Problem IV
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) 2,400,000
Cash 2,400,000
To recognize the purchase of an ownership-interest in a jointly controlled aircraft.
In 20x4
Cash 12,000
Profit or loss (rental income) 12,000
To recognize income earned in renting to others the use of the aircraft in 20x4.
Profit or loss (aircraft operating expenses) 180,000
Cash 180,000
To recognize the costs of running an aircraft in 20x4.
Profit or loss (depreciation expense) 120,000
Accumulated depreciation (interest in an aircraft 120,000
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. Problem V
1. The following are the summaries of the above transactions for a joint operation in the form of a partnership: Event Investment in Joint Operation AA BB CC Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. a. P 12,000 P12,000 b. 120,000 120,000 6,000 P 6,000 c. 180,000 120,000 P60,000 d. P588,000 P204,000 P312,000 P72,000 e. 3,600 3,600 3,600 10,800 6,000 6,000 f. * ________ ___3,000 ___3,000 ________ ________ ______ _______ _______ P318,000 P597,000 P210,600 P252,000 P315,600 P 60,000 P81,600 P 16,800
NI** _297,000 ________ ________ __112,200 ________ _147,000 _______ 31,800 P597,000 P597,000 P210,600 P364,200 P315,600 P195,000 P81,600 P48,600 Cash*** Settle- ment _______ ________ _153,600 ________ ________ _120,600 _______ _33,000 Totals P597,000 P597,000 P364,200 P364,200 P315,600 P315,600 P81,600 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 Total
Allowance for cleaning-up operations P 3,000 P 3,000
Commission: Aljon: 40% of P204,000 P81,600 81,600 Elerie: 40% of P312,000 P124,800 124,800 Mac: 40% of P72,000 28,800 28,800 Balance (75%: 25%) 30,600 10,200 _______ 40,800 Total P112,200 P135,000 P31,800 P279,000 **Total credits of P597,000 – Total debits of P318,000 = P279,000, net income.
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 VI
Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4
Cost of investment
Consideration transferred P2,016,000
Less: Book value of stockholders’ equity of Son:
Common stock (P3,600,000 x 30%) P 1,080,000
Retained earnings (P1,080,000 x 30%) 324,000 1,404,000
Allocated excess (excess of cost over book value) P 612,000
Less: Over/under valuation of assets and liabilities:
Increase in inventory (P240,000 x 30%) P 72,000
Increase in land (P960,000 x 30%) 288,000
Increase in building (P600,000 x 30%) 180,000
Decrease in equipment (P840,000 x 30%) ( 252,000)
Increase in bonds payable (P120,000 x 30%) ( 360,000) 252,000 Positive excess: Goodwill (excess of cost over fair value) P 360,000 The over/under valuation of assets and liabilities are summarized as follows:
Anton Co. Book value Anton Co. Fair value (Over) Under Valuation Inventories (sold in 20x4) P1,200,000 P1,440,000 P 240,000 Land 1,080,000 2,040,000 960,000
Equipment – net ( 7 year remaining life) 1,440,000 600,000 ( 840,000) Bonds payable (due January 1, 20x9) ( 1,200,000) (1,320,000) ( 120,000)
Net P4,320,000 P5,160,000 P 840,000
A summary or depreciation and amortization adjustments is as follows: Account Adjustments to be amortized
Over/ Under 30% thereof Life Current Year(20x4) Inventories (sold in 20x4) P 240,000 P 72,000 1 P 72,000 Land 960,000 288,000 - -
Buildings – net ( 10 year remaining life) 600,000 180,000 10 18,000 Equipment – net ( 7 year remaining life) ( 840,000) ( 252,000) 7 (36,000) Bonds payable (due January 1, 20x9) ( 120,000) ( 36,000) 5 ( 7,200)
Net P 840,000 P 252,000 P 46,800
The following are entries recorded by the parent in 20x4 in relation to its investment in joint venture:
January 1, 20x4:
(1) Investment in DD Company 2,016,000
Cash 2,016,000
Acquired 30% joint control in DD Company. January 1, 20x4 – December 31, 20x4:
(2) Cash 216,000
Investment in DD Company (P720,000 x 30%) 216,000
Record dividends from DD Company. December 31, 20x4:
(3) Investment in DD Company 432,000
Investment income (P1,440,000 x 30%) 432,000
Record share in net income of DD Company. December 31, 20x4:
(4) Investment income 46,800
Investment in DD Company………. 46,800
Record amortization of allocated excess of inventory, equipment, buildings and bonds payable.
Thus, the investment balance and investment income in the books of TT Company is as follows:
To check the balance of Investment in Joint Venture (DD Company): Investment in Joint Venture (DD Company)
Cost, 1/1/x4 2,016,000 216,000 Dividends – Son (720,000x 80%)
NI of Anton 46,800 Amortization (1,440,000 x 30%) 432,000 Balance, 12/31/x4 2,185,200 Investment Income Amortization 46,800 NI of Son 432,000 (P1,440,000 x 30%) 385,200 Balance, 12/31/x4
DD Company’s Stockholders’ Equity, 12/31/20x4: Common stock P3,600,000 Retained earnings Retained earnings,1/1/20x4 P 1,080,000 Net income – 20x4 1,440,000 Dividends – 20x4 ( 720,000) 1,800,000
Book value of stockholders’ equity of DD Company,12/31/20x4 P5,400,000
Multiplied by: Interest in Joint Venture 30%
Book value of Interest in Joint Venture P1,620,000
Add: Unamortized allocated excess – 30% thereof
P252,000 – P46,800, amortization) 205,200
Goodwill 360,000
Investment in Joint Venture (DD Company) – equity method P2,185,200 Multiple Choice Problems
1. a
Books of X
Inv. in JO X, capital Journal entry for settlement should be: Z, capital……….. 6,500 4,000 6,500 2,500 X, capital……… 2,500 2,500 Y, capital……… 4,000 Books of Y Inv. in JO Y. capital 2,500 6,500 4,000 4,000 Books of Z Inv. in JO Z, capital 2,500 6,500 4,000 6,500 2.
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 3. d
Jose, capital
8,500 investment
1,212 share in net income (P6,060 x 2/10) 9,712
4. a – The 20,000 shares should be valued at market value, thus, P800,000 (20,000 shares x P40 per share)
5. b
Jose, capital
20,000 shares at P40/share P800,000 P 198,000 (4,500 x P44) – Sales Expenses 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
Joint operation loss P 37,100 *
9/30 Shares issued (6,000 + 10,000 + 4,000) 20,000
10/20 Sold (4,500)
11/ 1 Stock dividend (20,000 – 4,500) x 20% 3,100
11/15 Sold (5,000)
Balance of shares outstanding before cash dividend 13,600
Therefore, Roxas share would be P11,130 (P37,100 x 6,000/20,000 shares) 6. c
Investment in Joint Operations
Share in net loss P400,000 Investment (10,000 shares x P40)
P37,100 x (10,000/20,000) P18,550
P381,450 7. b
Unrealized loss due to decline in the value of shares at the time of investment
(P62 – P40) x 4,000 shares P68,000
Share in joint operation (P37,100 x 4/20) __7,420
Reduction of loss by cash dividend (P13,600 x 4/20) P98,140
8. a
Investment in Joint Operations
before net income or loss 15,000 25,000 ending inventory 10,000 net income
9. a (A- P10,000 x 50% = P5,000; B – P10,000 x 30% = P3,000; C – P10,000 x 20%) 10. a
Joint Operations Anson, Capital Purchases 20,000 77,000 Sales (?) Unsold merchandise 600 20,000
Contr/Invest 20,000 18,600 Profit(50%) Expenses 800 1,800 600 38,600 42,600 77,000 38,000 to Alas 34,400 (P16,000+ P18,400) 2,800 (P600 + P2,200) Unsold merchandise 37,200 Net profit
11. c – refer to No. 10 computation. 12. a
13. a – refer to No. 12 for computation 14. c
Investment in Joint Operations before sale 6,500 3,500 Sales Net loss 3,000
Distribution of Loss:
15. a – refer to No. 14 for computation 16. a
Investment in Joint Operations Purchases 45,000 48,700 Sales 18,000 16,800
Interest expense 80 40 Dividend 50 100
63,130 65,640
2,510 2,510 Net income
17. a – refer to No 16 for computation
Nelson, capital 2,405
McKee 2,405
Investment in Joint Operations Santo, capital
Purchases 10,000 7,200 sales 10,000 Contribution/Invest
Freight-in 240 5,120 unsold 910 Share in NI
Freight-out 260 (P10,000 + P240) x 1/2 10,500 12,320 10,910 1,820 N, capital O, capital 1,100 14,500 1,100 6,500 13,400 5,400 M N O Total Salary P 300 P - P - P 300 Balance, equally (1,100) (1,100) (1,100) (3,300) P ( 900) P(1,100) P(1,100) P(3,000)
McKee, capital Nelson, capital
48,700 45,000 16,800 18,000 40 80
1,225 share in NI 100 50 1,225 share in NI
18. b
Investment in Joint Operations Purchases 950 800 sales Expenses 150 600
1,100 1,400
300 Net income
The entry for the settlement would be as follows (Car will pay Bar P420):
Bar, capital 420
Car, capital 420
Distribution of net income
19. b – refer to No. 18 for computations. 20. c
21. b
Revenues
Total cash receipts (P78,920 + P65,245) P144,345
Less: Cash investments (P30,000 + P20,000) 50,000
Cash sales P 94,345
Add: Proceeds from sale of remaining assets 60,000
Total Revenue P154,345
Less: Expenses (P62,275 + P70,695) 132,970
Net income P 21,375
22. c
Bar, capital Car, capital
800 950 600 150
270 30
800 1,220 600 180
420 due to Due from 420
Bar Car Total
Commission on net purchases:
20% x P950 P190 P190 Commission on sales: 25% x P800 25% x P600 200 P150 200 150 Balance, equally (120) (120) (240) P270 P 30 P300)
Investment in Joint Operations Tan, capital
15,000 before P/L 27,000
10,500 unsold merchandise unsold merch. 10,500 4,500 share in NI (1/3 x P13,500)
Salary – Reyes 12,000 25,500 net income 10,500 31,500
13,500 21,000
Benin, capital Sucat, capital
Receipts 78,920 30,000 Contribution Receipts 65,425 20,000 Contribution
62,275 Disbursement 70,695 Disbursement
12,825 Share in NI (3/5) 8,550 Share in NI (2/5)
78,920 105,100 65,425 99,245
23. 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
24.
The Investment in Basket Co. as of December 31 is as follows:
Acquisition cost, January 1, 2013 P 500,000
Add (deduct):
Share in net income (P90,000 x 40%] 36,000
Share in dividends (P30,000 x 40%) ( 12,000)
Amortization of allocated excess ( 16,400)
Investment balance on December 31 P 507,600
Cost of investment P 500,000
Less: Book value of interest acquired [40% x (P1,400,000 – P500,000)] 360,000
Allocated excess P 140,000
Less: Over/undervaluation of assets and liabilities:
Increase in building (P140,000 x 40%) 56,000
Increase in trademark (P210,000 x 40) 84,000
Amortization of allocated excess:
Building: P56,000 / 7 years P 8,000
Trademark: P84,000 / 10 years 8,400
25. 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 P 500,000
Add (deduct):
Share in dividends (P30,000 x 40%) ( 12,000)
Amortization of allocated excess ( 16,400)
Investment balance on December 31 P 507,600
Cost of investment P 500,000
Less: Book value of interest acquired [40% x (P1,400,000 – P500,000)] 360,000
Allocated excess P 140,000
Less: Over/undervaluation of assets and liabilities:
Increase in building (P140,000 x 40%) 56,000
Increase in trademark (P210,000 x 40) 84,000
Amortization of allocated excess:
Building: P56,000 / 7 years P 8,000
Trademark: P84,000 / 10 years 8,400
Total P 16,400
26. b – refer to No. 25 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
27. 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 P 600,000
Add (deduct):
Share in net income [(P140,000 x 3 years) x 40%] 168,000 Share in dividends [(P50,000 x 3 years) x 40%] (60,000)
Amortization of allocated excess ( 0)
Investment balance on December 31 P 708,000
Cost of investment P 600,000
Less: Book value of interest acquired (40% x P1,200,000) 480,000 Allocated excessP 120,000
Less: Over/undervaluation of assets and liabilities 0
Goodwill P 120,000
There is no indication as to impairment of goodwill. 28. d
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 40%) P 56,000
Amortization of allocated excess ( 0)
Income from Investment on December 31, 2015 P 56,000
29. d
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 40%) P 56,000
Amortization of allocated excess ( 0)
Income from Investment on December 31, 2015 P 56,000
30. 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 40%) P 56,000
Amortization of allocated excess ( 0)
Income from Investment on December 31, 2015 P 56,000
31. 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
Multiple Choice Problems – SME for Joint Ventures 1. a 2. a 3. a 4. a 5. c 6. a 7. a 8. a 9. c 10. a 11. a 12. c 13. a 14. 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, 20x4………...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 increase in fair value is recognized to profit and loss.
18. a
Cost of investment in entity Z:
Purchase price……….. P 28,000 Add: Transaction costs (1% x P28,000)……… 280 Initial costs……….. P 28,280 Less: SME A’s share of entity Z’s loss for the year (25% x P20,000)……... 5,000
Costs of investment, December 31, 20x4………. P23,280 Less: Fair value on December 31, 20x4………...P 15,000
Less: Costs to sell (5% x P15,000)……….. 750 14,250 Impairment loss……….. P 9,030
19. b
Cost of investment in entity Z………. ……… ..P 28,000 Less: Fair value on December 31, 20x4………... 15,000 Decrease in fair value on December 31, 20x4………P 13,000
20. a
Entity X:
Cost of investment in entity X………. ……… P 10,000 Less: Fair value on December 31, 20x4………... 13,000 Increase in fair value on December 31, 20x4……… P 13,000
Entity Y:
Cost of investment in entity Y………. ……… P 15,000 Less: Fair value on December 31, 20x4………... 29,000 Increase in fair value on December 31, 20x4……… P 14,000
21. d – refer to paragraphs PFRSs for SMEs paragraphs 15.10 and 15.11
20x4: P101,000 because recoverable amount – fair value less costs to sell of P98,000 is less than the cost of P101,000.
20x5: P101,000 because it is less than recoverable amount.
20x6: P86,000 because recoverable amount of P86,000 is less than cost of P101,000.
