Posted: December 5th, 2016
Prepare the journal entries on 1 July 2013 in the books of M Ltd and Y Ltd to record their investment in the jointly controlled entity – L Ltd.
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 plant contributed by M Ltd has a book value of $40 000 (cost $88 000; accumulated depreciation $48 000), and a fair value of $50 000 with five years remaining useful life.
- The new machinery contributed by Y Ltd has a book value of $31 000 and a fair value of $25 000 with no depreciation history and five years useful life.
- The cash that is contributed by Y Ltd is used partly to acquire some additional machinery at a cost of $7 000, with the balance of the cash on hand to meet operational requirements.
- All current and future contributions are to be based on a 50:50 split, as are the future distributions of output.
- The joint venture agreement stated that a manager will be appointed with the responsibility for growing, harvesting and marketing the Bananas. The manager is also responsible for ensuring all plant of the joint venture is maintained to a satisfactory service level.
- The harvest amounted to 600 tonnes of Bananas, which the manager sold for $1000 per tonne.
- L Ltd has adopted an accounting policy whereby plant and machinery are depreciated on a straight-line basis over its useful life. Accordingly the plant and machinery will be depreciated over five years.
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:
- i) Prepare the journal entries on 1 July 2013 in the books of M Ltd and Y Ltd to record their investment in the jointly controlled entity – L Ltd.
- ii) Prepare the adjusting journal entries required under equity method of accounting for the year ended 30 June 2014 in the financial statements of M Ltd and Y Ltd in relation to their investment in the jointly controlled entity – L Ltd.
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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