Question
Sven enters into a joint operation with 40% share of an olive orchard on January 1, 2018. It was agreed that no separate entity would
Sven enters into a joint operation with 40% share of an olive orchard on January 1, 2018. It was agreed that no separate entity would be set up under the joint operation, and assets, liabilities, revenues and costs would be apportioned on the basis of the shareholding.
The orchard cost $10 million. It also cost $15 million to set up the nets and tree vibrators to harvest the olives, for the washing machines to separate the olives from leaves, dirt and twigs, for the motorized mixing and hydraulic press machines to extract the oil. This set up was completed in June 30, 2018. In the year to June 30, 2019, oil and fruit with a direct cost of $16 million was sold for $20 million. Additionally, the joint operation incurred operating costs of $0.5 million during the year. The life of all the equipment is estimated at 10 years.
The revenue and costs are receivable and payable by the other joint operator, Olaf, who settles amounts outstanding to Sven after the year end.
Explain the nature of the joint operation and with suitable calculations, show how the joint operation should be accounted for in Sven's financial statement as at June 30, 2019.
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