On 1 July 2020, Shaz Ltd and Molly Ltd entered into a joint venture by investingin a
Question:
On 1 July 2020, Shaz Ltd and Molly Ltd entered into a joint venture by investingin a jointly controlled incorporated entity - Vineyards Pty Ltd. The purpose of the joint venture was to lease a 40-hectare vineyard for a five-year period at an annual lease rental of $200 000. Neither investor was a parent entity. Shaz Ltd and Molly Ltd contributed the following assets to the joint venture in exchange for a 50% voting equity interest in Vineyards Pty Ltd.
Carryingvalue$ Fair value$ |
ShazLtd-Plant------------------ 80 000 100 000 MollyLtd-Cash------------------ 100000 100 000 |
The remaining useful life of the plant contributed by Shaz Ltd is five years. The jointventureagreement statedthatamanagerwillbeappointed withtheresponsibility for growing, harvestingand marketingthe grapes. Themanageris also responsiblefor ensuring all plant of the joint venture is maintained to a satisfactory service level.
Additionalinformation:
- During the year ended 30 June 2021 each of the investors made an additional cash contribution of $50 000 in exchange for an additional equal voting equity interest in Vineyards Pty Ltd.
- The harvest amounted to 300 tones of grapes, which the manager sold for $1 200 per tone.
- Vineyards Pty Ltd. has adopted an accounting policy whereby plant is depreciated on a straight-line basis over its useful life. Accordingly the plant will be depreciated over five years.
The following financial statements were prepared for Vineyards Pty Ltd. For the year ended 30 June 2021.
Balancesheet asat 30June2021 | |
Assets: | $ |
Cashandcash equivalents | 80 000 |
Property,plantand equipment | 200 000 |
Sundryassets/accountreceivable | 100 000 |
Totalassets | 380 000 |
Liabilities: | |
Tradeandother payables | 5 000 |
Currenttax payable | 25 000 |
Totalliabilities | 30 000 |
Net assets | 350 000 |
Equity: Share capital Retainedearnings Total equity | 300 000 50 000 350 000 |
Incomestatementfor the yearended30June2021 | |
$ | |
Salesrevenue | 360 000 |
LessExpense | 285 000 |
Profitfromcontinuingactivitiesbeforetax | 75 000 |
LessIncometax expense | 25 000 |
Profitfortheyear | 50 000 |
Required:
- Prepare the journal entries on 1 July 2020 in the books of Shaz Ltd and Molly Ltd to record their investment in the jointly controlled entity - Vineyards Pty Ltd.
- Prepare the adjusting journal entries required under equity method of accounting for the year ended 30 June 2021 in the financial statements of Shaz Ltd and Molly Ltd in relation to their investment in the jointly controlled entity - Vineyards PtyLtd.
- 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 Shaz Ltd, it will be responsible for ensuring the plant is maintained to a satisfactory service level.