Question
On 1 July 2016 T Ltd enters into a joint venture arrangement with S Ltd establishing an incorporated B Ltd. company Both venturers commit themselves
On 1 July 2016 T Ltd enters into a joint venture arrangement with S Ltd establishing an incorporated B Ltd. company Both venturers commit themselves to a contractual arrangement in which T Ltd contributes plant and machinery with a fair value of $40million; S Ltd contributes cash of $20million and land with a fair value of $20million, which is considered to be a good site for the extraction of minerals. The cash that is contributed is used partly to acquire some additional machinery at a cost of $14million, with the balance of the cash on hand to meet operational requirements.
Additional information:
- The machinery contributed by T Ltd has a book value of $42million (cost $60million; accumulated depreciation $18million), and a fair value of $40million
- The land contributed by S Ltd has a book value of $16million and a fair value of $20million
- All current and future contributions are to be based on a 50:50 split, as are the future distributions of output.
For the year ending 30 June 2017, the joint venture prepares the following balance sheet, cash flow statement and statement of production costs. To date, no minerals have been removed, although the venturers do consider that economically recoverable reserves exist. All production costs have been transferred to an asset account called deferred exploration and evaluation expenditure in anticipation of amortising the asset as production commences.
Statement of Costs of Production (For year ending 30 June 2017)
$000
Direct Costs:
Wages
Materials
Other costs
Management fees
1 600
1 200
400
1 200
4 400
Statement of Cash Flows (For year ending 30 June 2017)
$000
$000
Cash Flows from Operations:
Payments
- Wages
- Materials
- Other costs
- Management fees
Cash Flows from Investing Activities:
acquisition of machinery
Cash Flows from Financing Activities:
from joint venturer - S Ltd
Cash on hand 30 June 2017
1 400
1 000
400
400
(3 200)
(14 000)
20 000
2 800
Joint Venture Balance Sheet(As at 30 June 2017)
$000
Current Assets:
Cash on hand
Deferred exploration and evaluation expenditure
Non-current Assets:
Plant and machinery
Land
Total Assets
Less: Current Liabilities
Accounts payable
Net Assets
Represented by:
Interests of venturers
T Ltd
S Ltd
2 800
4 400
54 000
20 000
81 200
1 200
80 000
40 000
40 000
80 000
Required:
Prepare the journal entries in the records of T Ltd. and S Ltd. for the year ended 30 June 2017 in accordance with equity method of accounting.
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