On 1 July 2021, Company A Ltd plan to enter into a joint operation agreement with Company B Ltd to undertake a large road construction project. To commence the operation, each company will contribute cash and equipment in unequal proportions and additionally, Company A will contribute already held materials to the project. The directors want to understand how the Joint Operation will be reported as a separate venture and in the books of Company A Ltd. The breakdown of the contributions has yet to be decided so you will need to put in estimates for cash (sufficient to cover first year cash payments) and equipment to complete the example for the directors. The estimated total contribution for each company is $2,000,000 (Fair Value). Equipment Cash Materials TOTAL Fair Value Company A $? $ ? $500,000 $2,000,000 Company B $ ? $? $0 $2,000,000 The Equipment in the books of Company A Ltd has a carrying value of 20% less than the fair value and the materials had an original cost $450,000. The project is expected to take 3 years to complete, with completion milestones of: 30 June 2022 30%, 30 June 2023 50% and 30 June 2024 20%. The customer will be invoiced from the joint operation at each of the stages of completion. You have estimated the joint operation's results for the year ended 30 June 2022 as follows: Payments for the year ended 30 June 2022 by Joint Operation Cash Payments Equipment purchased (1/7/21) $ 400 000 Wages 300 000 Materials 350 000 General administration expenses 120 000 1.50 000 85 000 Additional information and estimates for 30 June 2022 Capitalised Materials in Inventory Accounts payable - Materials Equipment purchased is depreciated over the life of the project in proportion to completion stages Equipment contributed At 30 June 2022 the customer will be invoiced cost plus 20% a. b. c. Prepare the journal entry as it would appear in the books of Company A Ltd for the initial contribution at 1 July 2021. (4 marks] Prepare a projected Income Statement and Balance Sheet for the Joint Operation at 30 June 2022 including calculation of the invoice to the customer. [5 marks] Prepare the journal entry in the books of Company A Ltd in relation to the joint operation in accordance with AASB 11 Joint Arrangements for the year ended 30 June 2022. (5 marks] Advise the directors how the journal entries for Company B Ltd would differ from the entries for Company A Ltd to record the joint operation in their books at for the initial contribution and at 30 June 2022. Assume Company B Equipment had a fair value equal to book value. [3 marks] Advise the directors, reasons why companies may elect to form a joint arrangement to undertake this type of project. d. e. On 1 July 2021, Company A Ltd plan to enter into a joint operation agreement with Company B Ltd to undertake a large road construction project. To commence the operation, each company will contribute cash and equipment in unequal proportions and additionally, Company A will contribute already held materials to the project. The directors want to understand how the Joint Operation will be reported as a separate venture and in the books of Company A Ltd. The breakdown of the contributions has yet to be decided so you will need to put in estimates for cash (sufficient to cover first year cash payments) and equipment to complete the example for the directors. The estimated total contribution for each company is $2,000,000 (Fair Value). Equipment Cash Materials TOTAL Fair Value Company A $? $ ? $500,000 $2,000,000 Company B $ ? $? $0 $2,000,000 The Equipment in the books of Company A Ltd has a carrying value of 20% less than the fair value and the materials had an original cost $450,000. The project is expected to take 3 years to complete, with completion milestones of: 30 June 2022 30%, 30 June 2023 50% and 30 June 2024 20%. The customer will be invoiced from the joint operation at each of the stages of completion. You have estimated the joint operation's results for the year ended 30 June 2022 as follows: Payments for the year ended 30 June 2022 by Joint Operation Cash Payments Equipment purchased (1/7/21) $ 400 000 Wages 300 000 Materials 350 000 General administration expenses 120 000 1.50 000 85 000 Additional information and estimates for 30 June 2022 Capitalised Materials in Inventory Accounts payable - Materials Equipment purchased is depreciated over the life of the project in proportion to completion stages Equipment contributed At 30 June 2022 the customer will be invoiced cost plus 20% a. b. c. Prepare the journal entry as it would appear in the books of Company A Ltd for the initial contribution at 1 July 2021. (4 marks] Prepare a projected Income Statement and Balance Sheet for the Joint Operation at 30 June 2022 including calculation of the invoice to the customer. [5 marks] Prepare the journal entry in the books of Company A Ltd in relation to the joint operation in accordance with AASB 11 Joint Arrangements for the year ended 30 June 2022. (5 marks] Advise the directors how the journal entries for Company B Ltd would differ from the entries for Company A Ltd to record the joint operation in their books at for the initial contribution and at 30 June 2022. Assume Company B Equipment had a fair value equal to book value. [3 marks] Advise the directors, reasons why companies may elect to form a joint arrangement to undertake this type of project. d. e
