Joint Arrangement 116

CHAPTER 6

SOLUTIONS TO MULTIPLE CHOICES

6-1: a
Rental Income P5 million
Expenses (P200,000 + P P1,000,000) 1.2
Net income, 2013 P3.8 million

6-2: a
Rental income P8.0 million
Expenses .5
Net income, 2014 P7.5 million

6-3: a
Investment P10.00 million
Profit share (P3.8 million x 40%) 1.52
Interest entity A, Dec. 31, 2013 P11.52 million

6-4: d
Investment P10.00 million
2013: Profit share (P3.8 M x 40%) in entity A 1.52
2014: Profit share (P7.5 M x 40%) in entity A 3.00
Dividends received (P3 M x 40%) (1.20)
Interest in entity A, Dec. 31, 2014 P13.32 million

6-5: b
Cash P 50,000
Transportation equipment 600,000
Furniture and fixtures 250,000
Total assets P900,000
6-6: c
Cash P 50,000
Furniture and fixtures 250,000

Total assets P300,000

6-7: d
Accounts payable P600,000
Other liabilities 100,000
Total liabilities P700,000

6-8: a
Other liabilities P100,000
117
Chapter 6

6-9: a
Investment in Bank XY P50.0 M
Profit share in Bank XY 2013 (P4 M x 40%) 1.6 M
Interest of Bank X, December 31, 2013 P48.4 M

6-10: a
Investment in Bank XY P50.0 M
Profit share in Bank XY 2013 (P4 M x 40%) 1.6 M
Profit share in Bank XY 2013 (P5 M x 40%) 2.0 M
Dividends received (4 M x P40%) (1.6) M
Interest of Bank Y, December 31, 2014 P52.0 M

6-11: a
Cash (P3,000,000 less P700,000) P2,300,000
Property, plant and equipment P30,000,000 less P1,400,000) 28,600,000
Total assets P30,900,000

6-12: b
Total equity P30,900,000
Divided by 3
Interest of each party P10,300,000

6-13: a
At cost of P300,000.

6-14: c
Dividends declared, 1/2/2013 (P100,000 x 30%) P30,000
Dividends declared, 12/31/2013 (P150,000 x 30%) 45,000
Total dividend income P75,000

6-15: a
At fair value of P425,000.

6-16: a
Fair value of investment P293,000
Cost to sell (3,000)
Investment in entity AB, 12/31/2013 P290,000

6-17: a
Cost P300,000
Recoverable amount 290,000
Impairment loss P 10,000

6-18: a
Dividend income (P300,000 x 30%) P90,000
Increase in fair value (P850,000 P600,000) 250,000
 Increased in profit and loss P340,000

Joint Arrangements 118

6-19: b
At fair value P850,000.

6-20: c
Cost P300,000
Share in earnings of Entity Z (P400,000 x 30%) 120,000
Dividends received, 1/20/2013 (P100,000 x 30%) (30,000)
Dividends received, 12/31/2013) (P150,000 x 30%) (45,000)
Investment in Entity Z, 12/31/2013 P345,000

No impairment in 2013, fair value exceeds the carrying amount.

6-21: a
Cost P300,000
Share in Entity Zs loss (P100,000 x 30%) (30,000)
Carrying amount of venturers investment in entity Z, 12/31/2013 P270,000

No impairment loss in 2013, carrying amount of P270,000 is lower that its recoverable
amount 0f P310,000.

6-22: d
Cost of investment in Entity Z P300,000
Share in Entity Zs loss, 2013 (P100,000 x 30%) (30,000)
Carrying amount before impairment 270,000
Impairment loss:
Recoverable amount P265,000
Carrying amount before impairment 270,000 (5,000)
Investment in Entity Z, 12/31/2013 P265,000

6-23: a
Cost of investment in Entity RS, 1/1/2013:
Carrying amount of machine P160,000
Realized gain (200,000 160,000) x 50% 20,000 P180,000
Share in entity RS profit (P60,000 x 50%) 30,000
Realized gain (P20,000 10 yrs.) 2,000
Investment in entity RS, 12/31/2013 P212,000

6-24: c
Cost of investment in entity O P450,000
Share in entity Os profit, 12/31/2013 (P600,000 x 30%) 180,000
Unrealized profit (P90,000 x 50/150) x 30% 9,000
Dividends received (P225,000 x 30%) (67,500)
Investment in entity O, 12/31/2013 P553.500
119
Chapter 6

6-25: b, should be P786,286

Cost of investment P600,000
Share in entity Z realized profit:
Profit, 12/31/2013 P800,000
Unrealized profit in inventories (120,000 x 40%/140%) (34,285)
Realized profit, 12/31/2013 P765,715
Multiply by 40% 306,286
Dividends received (300,000 x 40%) (120,000)

Investment in entity Z, 12/31/2013 P786,286

Joint Arrangements 120

SOLUTIONS TO PROBLEMS

Problem 6 1

Books of Lebron

Construction costs 12 M
Cash / Accounts payable 12 M
To record the construction costs incurred in 2013.

Cash 15 M
Construction revenue 15 M
To record one-half of the construction revenue earned in 2013

Construction revenue 15 M
Construction costs 12 M
Income summary 3M
To close construction revenue and costs of construction

Books of Durant

Construction costs 10 M
Cash/ Accounts payable 10 M
To record the construction costs incurred in 2013

Cash 15 M
Construction revenue 15 M
To recognize one half of the construction revenue.

Construction revenue 15 M
Construction costs 10 M
Income summary 5M
To close construction revenue and costs of construction.

Problem 6 2

Books of Bryant

Cash (50%) 20,000

Property, plant and equipment (100%) 240,000
Other assets (50%) 100,000
 Current liabilities(100%) 240,000
Long-term debt (50%) 50,000
Equity 70,000
To record interest in joint arrangements BW

121
Chapter 6

Problem 6-2, continued:

Books of Wade:

Cash (50%) 20,000

Other assets (50%) 100,000
Long-term debt(50%) 50,000
Equity 79,000
To record interest in the joint arrangements BW

Problem 6 3

Books of Lin:

2013:
Investment in joint venture 10 M
Cash 10 M
To record investment in the joint venture

Investment in joint venture 1 M

Income from joint venture 1 M
To record share in the net income of LK (2 M x ).

2014:
Investment in joint venture 1.5 M
Income from Joint Venture 1.5 M
To record share in the net income of LK (3 M x ).

Cash .5 M
Investment in joint venture .5 M
To record dividends received from LK.

Books of Kid:

2013:
Investment in joint venture 10 M
Cash 10 M
To record investment in the joint venturet

Investment in joint venture 1M

Income from joint venture 1 M
To record share in the net income of the joint venture
122
Chapter 6

Problem 6-3, continued:

2014:
Investment in joint venture 1.5 M
Income from joint venture 1.5 M
To record share in the net income of the joint venture.

Cash .5 M
Investment in joint venture .5 M
To record dividends received for the year.

Problem 6 4
Requirement (1)

Books of SME X (Cost Model):

2013:
January 1:

Investment in jointly controlled entity (entity A) 100,000

Investment in jointly controlled entity (entity B) 150,000
Investment in jointly controlled entity (entity C) 280,000
Cash 530,000
To record acquisition of investments in jointly controlled entities.

Investment in jointly controlled entity (entity A) 1,000

Investment in jointly controlled entity (entity B) 1,500
Investment in jointly controlled entity (entity C) 2,800
Cash 5,300
To record transaction costs incurred .

January 2:

Cash 2,500
Dividend income (profit or loss) 2,500
To record dividends received from entity A (P10,000 x 25%)

January 31:

Dividend receivable (entity B) 20,000

Dividend income 20,000
To record dividend receivable from entity B (P80,000 x 25%).
Impairment loss 140,300
Investment in jointly controlled entity (entity C) 140,300
To record impairment of the investment in entity C.

Joint Arrangements 123

Problem 6-4, continued:

Computations of the impairment loss:

Cost of investment in entity C (P280,000 + P2,800) P282,800

Fair value P150,000
Less estimated cost to sell (P150,000 x 5%) 7,500 142.500
Impairment loss P140,300

Books of SME Y (Fair Value Model):

2013:
January 1:

Investment in jointly controlled entity (entity A) 100,000

Investment in jointly controlled entity (entity B) 150,000
Investment in jointly controlled entity (entity C) 280,000
Cash 530,000
To record acquisition of investments in jointly controlled entities.

Transaction costs (profit or loss) 5,300

Cash 5,300
To record transaction costs incurred (P530,000 x 1%)

Cash 2,500
Dividend income (profit or loss) 1,500
To record dividends received from entity A (P10,000 x 25%)

December 31:

Dividend receivable 20,000

Dividend income 20,000
To record dividend receivable from entity B (P80,000 x 25%).

Profit or loss (change in fair value) 130,000

Investment in jointly controlled entity (entity C) 130,000
To record the decrease in fair value of investment in entity C (P280,000 cost less P150,000 fair value.

Investment in jointly controlled entity (entity A) 30,000

Investment in jointly controlled entity (entity B) 140,000
Profit or loss (change in fair value) 170,000
To record increase in fair value of investments in jointly controlled entities A and B.

Entity A Entity B
Fair value P130,000 P290,000
Cost 100,000 150,000
Increase P 30,000 P140,000

124 Chapter 6

Requirement (2)

Books of SME X (equity method):

2013
January 1:

Investment in jointly controlled entity (entity A) 100,000

Investment in jointly controlled entity (entity B) 150,000
Investment in jointly controlled entity (entity C) 280,000
Cash 530,000
To record acquisition of investments in jointly controlled entities.

Investment in jointly controlled entity (entity A) 1,000

Investment in jointly controlled entity (entity B) 1,500
Investment in jointly controlled entity (entity C) 2,800
Cash 5,300
To record transaction costs incurred.

January 2:

Cash 2,500
Investment in jointly controlled entity (entity A) 2,500
To record dividends received from entity A (P10,000 x 25%)

December 31:

Dividends receivable (entity B) 20,000

Investment in jointly controlled entity (entity B) 20,000
To record dividend receivable from entity B (P80,000 x 25%)

Investment in jointly controlled entity (entity A) 12,500

Income from jointly controlled entity (Profit or loss) 12,500
To record share of entity As profit for the year (P50,000 x 25%).

Investment in jointly controlled entity (entity B) 45,000

Income from jointly controlled entity (Profit or loss) 45,000
To record the share of entity Bs profit for the year (P180,000 x 25%)

Loss from jointly controlled entity (Profit or loss) 50,000

Investment in jointly controlled entity (entity C) 50,000
To record share of entity Cs loss for the year (P200,000 x 25%).
Impairment loss (profit or loss) 90,300
Investment in jointly controlled entity (entity C) 90,300
To record impairment of the investment in entity C:
Cost (P282,800 P50,000) P232,800
Less fair value P150,000
Cost to sell (P150,000 x 5%) (7,500) 142,500
Impairment loss P 90,300