Question 2: (35 marks) On 1 July 2013, Merlot Ltd and Malbec Ltd entered into a joint venture by investing in 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. Merlot Ltd and Malbec Ltd contributed the following assets to the joint venture in exchange for a 50% voting equity interest in Vineyards Pty Ltd. Image: assets register

The remaining useful life of the plant contributed by Merlot Ltd is five years. The joint venture agreement stated that a manager will be appointed with the responsibility for growing, harvesting and marketing the grapes. The manager is also responsible for ensuring all plant of the joint venture is maintained to a satisfactory service level. Additional information: a) During the year ended 30 June 2014 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. b) The harvest amounted to 300 tonnes of grapes, which the manager sold for $1 200 per tonne. c) 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 2014. Image: balance sheet

Image: income statement

Required: i) Prepare the journal entries on 1 July 2013 in the books of Merlot Ltd and Malbec Ltd to record their investment in the jointly controlled entity Vineyards Pty 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 Merlot Ltd and Malbec Ltd in relation to their investment in the jointly controlled entity Vineyards Pty 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 Merlot Ltd, it will be responsible for ensuring the plant is maintained to a satisfactory service level.

Fair value S 100 000 Carrying value S Merlot Ltd Plant 80 000 100 000 Malbec Ltd Cash 100 000 Balance sheet as at 30 June 2014 Assets: Cash and cash equivalents Property, plant and equipment Sundry assets/account receivable Total assets 80 000 200 000 100 000 380 000 Liabilities Trade and other payables Current tax payable Total liabilities Net assets 5 000 25 000 30000 350 000 Equity Share capital Retained earnings Total equit 300 000 50000 350 000