Posted: December 5th, 2016
On 1 July 2013, M Ltd and Y Ltd entered into a joint venture by investing in a jointly controlled incorporated entity – L Ltd. The purpose of the joint venture was to lease a 20-hectare reclaimed land for a five-year period at an annual lease rental of $100 000. Both venturers commit themselves to a contractual arrangement in which M Ltd contributes plant with a fair value of $50 000; Y Ltd contributes cash of $25 000 and machinery with a fair value of $25 000, which is considered to be a good new machine for Banana cultivation.
Additional information:
The following financial statements were prepared for L Ltd for the year ended 30 June 2014.
Balance sheet as at 30 June 2014 | $ |
Assets:
Cash and cash equivalents Property, plant and equipment Sundry assets/account receivable Total assets Liabilities: Trade and other payables Current tax payable Total liabilities Net assets Equity: Share capital Retained earnings Total equity |
120 000 300 000 150 000 570 000
7 500 37 500 45 000 525 000
450 000 75 000 525 000 |
Income statement for the year ended 30 June 2014 | $ |
Sales revenue
Less Expense Profit from continuing activities before tax Less Income tax expense Profit for the year |
540 000
427 500 112 500 37 500 75 000 |
Required:
iii) Explain how the journal entries required under (i) & (ii) could change if the joint venture agreement stated that due to the technical nature of the plant contributed by M Ltd, it will be responsible for ensuring the plant is maintained to a satisfactory service level.
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