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CHAPTER 3: JOINT ARRANGEMENT (IFRS 11)

Part 1: Theory of Accounts

1. It is characterized by a contractual arrangement whereby two or more parties


have joint control of the arrangement.
a. Joint arrangement
b. Joint operation
c. Joint venture
d. Joint controlled asset
2. It is the contractually agreed sharing of control of an arrangement which exists
only when decision about relevant activities require unanimous consent of the
parties sharing control.
a. Control
b. Significant influence
c. Joint control
d. Solidary control
3. It is a type of joint arrangement whereby the parties that have joint control of
the arrangement have right to the total assets and obligations for the total
liabilities relating to the arrangement.
a. Joint venture
b. Joint controlled asset
c. Joint operation
d. Joint business
4. It is a type of joint arrangement whereby the parties that have joint control of
the arrangement have rights to the net assets of the arrangement.
a. Joint venture
b. Jointly controlled asset
c. Joint operation
d. Joint business
5. What is the classification of the joint arrangement when the arrangement is
structured without a separate vehicle such as when the rights of each party to
the total assets and obligations for total liabilities relating to the arrangement
are clearly established?
a. It shall be classified as joint venture
b. It shall be classified as joint operation
c. Neither joint venture nor joint operation
d. It can be either a joint operation or joint venture depending on the
company policy of the parties to the joint arrangement.
6. What is the classification of the joint arrangement when the assets and
liabilities relating to the arrangement are held by a separate vehicle or when the
arrangement is established with a separate vehicle
a. It shall be classified as joint venture
b. It shall be classified as joint operation
c. Neither joint venture nor joint operation
d. It can be either a joint operation or joint venture depending on the legal
form of the separate vehicle, terms of the contractual arrangement or
other relevant facts and circumstances.
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7. Under IFRS 11, how shall the joint venturer account for its Investment in Joint
Venture?
a. Equity method
b. Cost method
c. Fair value method under IFRS 9
d. Proportionate consolidation
8. Under IFRS 11, as an exception to the general rule of mandatory equity method
accounting for Investment in Joint Venture, what is the alternative treatment
available to joint venturer for an investment in joint venture held or is held
indirectly through an entity that is a venture capital organization, mutual trust
fund, unit trust and similar entities including insurance-liked fund?
a. It may elect to measure the investment in joint venture at fair value
through profit or loss.
b. It may elect to measure the investment in joint venture at fair value
through other comprehensive income.
c. It may elect to measure the investment in joint venture at cost method.
d. It may elect to measure the investment in joint venture at proportionate
consolidation.
9. Under IFRS for SMEs, how shall the joint venture account for its Investment in
Joint Venture?
a. Equity method
b. Cost method
c. Fair value method under IFRS 9
d. Any of the above
10. Under IFRS 11, how shall the joint operator account for its interest in a joint
operation?
a. The joint operator shall account for its interest under Equity method.
b. The joint operator shall account for its interest under Cost method.
c. The joint operator shall account for its interest using proportionate
consolidation.
d. The joint operator shall account for its interest by recognizing its assets,
its revenue, its expenses and its shares in the jointly controlled assets,
jointly incurred liabilities, jointly earned revenue and jointly incurred
expenses in accordance with the contractual arrangement.

Part II. Problem Solving

1. On January 1, 2018, Entity A, a public entity, and Entity B, a public entity,


incorporated Entity C which has its fiscal and operational autonomy. The
contractual agreement of the incorporating entities provided that the decisions
on relevant activities of Entity C will require the unanimous consent of both
entities. Entity A and Entity B will have rights to the net assets of Entity C.

Entity A and Entity B invested P 1,000,000 and P 1,500,000, respectively,


equivalent to 40:60 capital interest of Entity C. The financial statements of
Entity C provided the following data for its two-year operation:
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Net income (loss) Dividends declared


2018 200,000 100,000
2019 (2,000,000) -

1.1. What is the balance of Investment in Entity C to be reported by Entity A


in its Statement of Financial Position on December 31, 2019?
a. 1,080,000 b. 1,040,000 c. 240,000 d. 200,000

1.2. What is the balance of Investment in Entity C to be reported by Entity B


in its Statement of Financial Position on December 31, 2019?
a. 1,500,000 b. 1,620,000 c. 360,000 d. 900,000

2. Entity A and Entity B incorporated Entity C to manufacture a microchip to be


used by the incorporating entities as component for their final products of
cellular phones and tablets.

The contractual agreement of the incorporating entities provided that the


decision on relevant activities of Entity C will require the unanimous consent of
both entities.

Entity A and Entity B have rights to the assets and obligations for the liabilities,
relating to the arrangement. The ordinary shares of Entity C will be owned by
Entity A and Entity B in the ratio of 60:40. At the end of first operation of Entity
C, the financial statements provided the following data:

Inventory 1,000,000 Accounts payable 2,000,000


Land 3,000,000 Note payable 1,000,000
Building 5,000,000 Loan payable 4,000,000
Share capital 1,000,000
Retained earnings 1,000,000
Sales revenue 5,000,000

The contractual agreement of Entity A and Entity B also provided for the
following concerning the assets and liabilities of Entity C:
 Entity A owns the land and incurs the loan payable of Entity C.
 Entity B owns the building and incurs the note payable of Entity C.
 The other assets and liabilities are owned or owned by Entity A and
Entity B in the amount of P 1,000,000 and P 2,000,000, respectively. As
of the end of the first year, Entity A and Entity B were able to resell 30%
and 60% of the inventory coming from Entity C to third persons.

2.1. What is the amount of total assets to be reported by Entity A concerning


its interest in Entity C?
a. 5,400,000 b. 3,000,000 c. 3,600,000 d. 5,000,000

2.2. What is the amount of total liabilities to be reported by Entity B


concerning its interest in Entity C?
a. 1,800,000 b. 2,200,000 c. 2,800,000 d. 2,400,000
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2.3. What is the amount of sales revenue to be reported by Entity A


concerning its interest in Entity C?
a. 2,300,000 b. 2,100,000 c. 3,000,000 d. 2,500,000

3. On January 1, 2018, Entity A, a public entity, and Entity B, a public entity,


incorporated Entity C by investing P 3,000,000 and P 2,000,000 for capital
interest ratio of 60:40. The contractual agreement of the incorporating entities
provided that the decisions on relevant activities of Entity C will require the
unanimous consent of both entities. Entity A and Entity B will have rights to
the net assets of Entity C.

The financial statements of Entity C provided the following data for 2018:
 Entity C reported net income of P 1,000,000 for 2018 and paid cash
dividends of P 400,000 on December 31, 2018.
 During 2018, Entity C sold inventory to Entity A with gross profit of P
50,000. 80% of those inventories were resold by Entity A to third person
during 2018 and the remainder was resold to third persons during 2019.
 On July 1, 2018, Entity C sold machinery to Entity B at a loss of P
20,000. At the time of sale, the machinery has remaining useful life of 2
years.

3.1. What is the investment income to be reported by Entity A for the year
ended December 31, 2018?
a. 603,000 b. 606,000 c. 594,000 d. 597,000

3.2. What is the balance of Investment in Entity C to be reported by Entity B


on December 31, 2018?
a. 2,246,000 b. 2,241,000 c. 2,238,000 d. 2,248,000

4. On January 1, 2016, Storm Inc. invested P 2M cash in a joint venture for 50%
interest. For the years ended December 31, 2016, 2017, 2018, the joint venture
reported the following net incomes and dividend distributions:
Net income (loss) Dividends declared
2016 1,000,000 300,000
2017 (6,000,000) -
2018 7,000,000 500,000

4.1. What is the share in net loss or investment loss to be reported by Storm
Inc. for the year ended December 31, 2017?
a. 3,000,000 b. 2,500,000 c. 2,350,000 d. 2,000,000

4.2. What is the book value of Investment in Joint Venture to be reported by


Storm Inc. as of December 31, 2018?
a. 1,600,000 b. 2,600,000 c. 1,250,000 d. 1,450,000

5. On January 1, 2018, Logan Inc., a small and medium enterprise (SME),


invested P 500,000 cash in a joint venture for 50% interest. For the year ended
December 31, 2018, the joint venture reported net income of P 200,000 and
distributed cash dividend in the amount of P 60,000. As of December 31, 2018,
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the fair value of the investment in joint venture is P 600,000 and the estimated
cost of disposal is 10% of fair value. The value in use of the investment is
estimated at P 550,000.

5.1. Under IFRS for SMEs, what is the book value of Investment in Joint
Venture to be reported by Logan Inc. as of December 31, 2018 if the SME
elects equity method?
a. 550,000 b. 540,000 c. 570,000 d. 600,000

5.2. Under IFRS for SMEs, what is the book value of Investment in Joint
venture to be reported by Logan Inc. as of December 31, 2018 if the SME
elects cost method?
a. 550,000 b. 540,000 c. 570,000 d. 500,000

5.3. Under IFRS for SMEs, what is the book value of Investment in Joint
venture to be reported by Logan Inc. as of December 31, 2018 if the SME
elects fair value method?
a. 550,000 b. 600,000 c. 570,000 d. 500,000

END

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