ACCT5942
Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: THEend8_
Part 1 Joint Arrangement
1. Accounting rule
(1) Accounting by the joint operation itself
• The journal entries represent the establishment of the joint operation
and its activities throughout the year.
• Transactions that occur regularly throughout the year, such as payment
of wages, are accumulated into one entry.
• In some cases, the costs may be transferred to the operators’ accounts
as expenses and matched in the records of the operators with the
revenue from sale of the output.
(2) Accounting by a joint operator
• The key feature of a joint operation is that the joint operator has an
interest in the individual assets and liabilities of the joint operation
• Its share of any jointly held assets
• Its share of any jointly held liabilities
• Its revenue from the sale of any output received from the
joint operation
• Its share of any revenue from the sale of any product that is
jointly constructed by the joint operators
• Its share of any expenses incurred by the joint operation
• Its expenses incurred in construction of a joint product.
Step 1: Contributions of assets to a joint operation and asset
records
On 1 July 2018, Tweed Ltd and Heads Ltd established a joint operation to manufacture a
product. Each company has a 50% interest in the operation and shares output equally. To
commence the operation, on 1 July 2018, Tweed Ltd contributed cash of $1 500 000 and
Heads Ltd contributed equipment which had a carrying amount of $1 000 000, and a fair value
of $1 500 000. The equipment is depreciated in the joint operation’s accounts at 10% p.a. on
cost
Records of Tweed Ltd
At 1 July 2018, Tweed Ltd gives up the cash contribution and recognises a share of the cash
and the equipment in the joint operation. Tweed Ltd will recognise a share of the fair value
of the asset.
The entry is:
Cash in JO Dr 750 000 [$1 500 000/2]
Equipment in JO Dr 750 000 [$1 500 000/2]
Cash Cr 1 500 000
The entry at 30 June 2019 in Tweed Ltd’s accounts is as follows.
Raw Material in JO Dr 50 000
Work in Progress in JO Dr 400 000
Inventories in JO Dr 100 000
Inventories[distributed] Dr 700 000 (1600k-200k)* 50% = 700k
Accum Depreciation — Equipment in JO Cr 75 000
Accounts Payable in JO Cr 60 000
Accrued Expenses in JO Cr 75 000
Bank Loan in JO Cr 500 000
Cash in JO Cr 540 000 [$750 000 − ($420 000/2)]
Records of Heads Ltd
In recording its contribution to the joint operation, Heads Ltd therefore recognises a gain on
selling half of the equipment to Tweed Ltd.
Heads Ltd’s share of the equipment in the joint operation is then based on the original
carrying amount of the asset.
At 1 July 2018, Heads Ltd contributes equipment to the joint operation, this having a carrying
amount in Heads Ltd different from the fair value of the asset. In recording its contribution to
the joint operation, Heads Ltd therefore recognises a gain on selling half of the equipment to
Tweed Ltd. Heads Ltd’s share of the equipment in the joint operation is then based on the
original carrying amount of the asset. The entry is:
Cash in JO Dr 750 000 [$1 500 000/2]
Equipment in JO Dr 500 000 [$1 000 000/2]
Equipment Cr 1 000 000
Gain on Sale of Equipment Cr 250 000 [$500 000/2]
【The Same】
Step 2: Depreciation Adjustment
• The depreciation recognised by Tweed Ltd is $75 000, which is based on the fair value
of the asset.
• Heads Ltd needs to recognise only $50 000 depreciation, which is 10% of $500 000.
• A further entry is necessary to reduce the accumulated depreciation recognised by
Heads Ltd and to reduce the cost of the work in progress and inventories relating to
the joint operation.
Accumulated Depreciation — Equipment in JO Dr 25 000 [10% × ($750 000 − $500 000)]
Work in Progress in JO Cr 8 333
Inventories in JO Cr 2 083
Inventories Cr 14 584
Step 3: Management fees paid to a joint operator
For the joint operator that does supply the service, normally it would incur a cost to supply
the service and earn a profit on the supply of that service.
On 1 July 2019, Broome Ltd and Kalbarri Ltd agreed to a joint operation that would be involved
in the production of furniture. The contractual arrangement required both parties to invest
$270 000 cash in the joint operation with each party having a 50% interest in the joint
operation. Under the contractual arrangement the joint operation would distribute the
output equally to each operator.
The joint operation agreed to pay Broome Ltd $30 000 p.a. to supply management services to
the joint operation. The cost to Broome Ltd to supply these services is $24 000.
At 30 June 2020 the joint operation reported the following information
Required
Prepare the journal entries in the records of Broome Ltd in relation to the joint operation for
the year ending 30 June 2020.
Step 1
Broome Ltd ’s record on 1 July 2019:
Cash in JO Dr 270 000
Cash Cr 270 000
(Investment in JO with Kalbarri Ltd)
Step 2:
30 June 2020:
Inventory Dr 140 000 (280 000/2)
Raw materials in JO Dr 18 000 (36 000/2)
Inventory in JO Dr 10 000 (20 000/2)
Work in progress in JO Dr 27 000 (54 000/2)
Machinery in JO Dr 112 500 (225 000/2)
Accumulated depreciation –equipment – JO Cr 22 500 (45 000/2)
Accounts payable in JO Cr 22 500 (45 000/2)
Accrued wages in JO Cr 9 000 (18 000/2)
Cash in JO Cr 253 500 (270 000 - 33 000/2)
Management fees paid to a joint operator
Management services expense Dr 24 000
Cash Cr 24 000
(Cost of supplying services to JO)
Cash Dr 30 000
Management services revenue Cr 30 000
(Receipt from JO for supply of services)
Management services revenue Dr 12 000
Management services expense Cr 12 000
(Elimination of expense of supply of services to self: ½ x $24 000)
services to self: ½ x $24 000)
The profit element on supplying services to the JO is $6000 i.e. $30 000 less $24 000. The
profit to itself i.e. $3000 is proportionately adjusted across inventory-related assets:
Share of $3000
Work in progress in JO $27 000 $458
Inventory in JO 10 000 169
Inventory 140 000 2 373
177 000 3 000
Management services revenue Dr 3 000
Work in progress in JO Cr 458
Inventory in JO Cr 169
Inventory Cr 2 373