QUESTION 5 (20 Marks)

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).

	Company A	Company B
Equipment	$ ?	$ ?
Cash	$ ?	$ ?
Materials	$500,000	$0
TOTAL Fair Value	$2,000,000	$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 operations 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)	$	400000
	Wages		300000
	Materials		350000
	General administration expenses		120000

Additional information and estimates for 30 June 2022

	Capitalised Materials in Inventory		150000
	Accounts payable - Materials		85000
	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%

Required

1. 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]

2. 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]

3. 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]

4. 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]

5. Advise the directors, reasons why companies may elect to form a joint arrangement to undertake this type of project.

[3 marks]

[Question 5 = 20 marks]