Joint Arrangement ( Controlled Entities )

1. On January 1, 2016 entities A and B each acquired 30% of the ordinary shares that carry voting rights at a
general meeting of shareholders of entity X for P300,000. Entities A and B immediately agreed to share control
over entity X. For the year ended December 31, 2016 entity X recognized a profit of P400,000.

On December 30,2016 entity X declared and paid a dividend of P150,000 for the year 2016. At December 31,2016
the fair value of each venturers investment in entity X is P425,000. Entities A and B uses the cost model to account
for its investment in jointly controlled entities. However, there is no published price quotation for entity X.
Investments are accounted for using the cost model.

At December 31,2016 the venturers must report their investment in entity X at:
a. P300,000
b. P345,000
c .P255,000
d. P420,000

At December 31, 2016 the venturers must report their investment in entity X (jointly controlled entity) at P300,000
(at cost). There is no impairment loss, because the fair value (P425,000) exceeds its carrying amount P300,000

2. Using the same facts in No.1 assuming on January 2, 2016 entity X also declared a dividend of P100,000
for the year 2015 and at December 31, 2016 the fair value of each venturer’s investment in entity X is P400,000.

How much dividend income each venturer should recognize on December 31,2016?
a. P45,000
b. P30,000
c. P75,000
d. P15,000

The venturers must, without regard to whether the distributions are from entity X’s accumulated profits arising
before or after January 1, 2016, each recognized dividend income of P75,000 in profit for the year ended December
31,2016. The computation is:

Dividends declared on January 2, 2016 (P100,000 x 30%) P 30,000

Dividends declared on December 31, 2016 (P150,000 x 30%) 45,000
Total dividend income P75,000

Using the same facts in No.1. However, there is a published price quotation for entity X.

3. How much income is to be recognized by each venture in profit or loss for the year ended December 31,
2016?
a. P165,000
b. P170,000
c. P125,000
d. P200,000

The venturers each recognize a total income of P170,000 computed as follows:

Dividend income (30% x P150,000) P 45,000

Increase in value of investment (P425,000 – P300,000) 125,000
Total income to profit or loss P170,000

4. At December 31, 2016 the venturers must each report its investment in entity X at:
a. P425,000
b. P300,000
c. P330,000
d. P345,000

At December 31, 2016 the venturers must each report its investment in entity X at P425,000 (at fair value). Even
though the venturers each used the cost model as its accounting policy for investment in entity X they account for
their investments using the fair value model because entity Z has a published price quotation.

Number 5 and 6 are based on the following data

On March 1, 2016 entities A and B each acquired 30% of the ordinary shares that carry voting rights at a general
meeting of shareholders of entity AB for P300,000. Entities A and B immediately agreed to share control over
entity AB.

On December 31,2016 entity AB declared a dividend of P100,000 for the year 2016. Entity AB reported a profit
of P80,000 for the year ended December 31, 2016. At December 31, 2016 the fair value of each venturers
investment in entity AB is P293,000 and the cost to sell amounts to P3,000. There is no published price quotation
for entity AB. Investments are accounted for using the equity method.

5. At December 31, 2016 entities A and B must each report their investment in entity AB at:
a. P290,000
b. P293,000
c. P300,000
d. P296,000

At December 31, 2016 entities A and B must each report their investment in entity AB at P290,000 (at
recoverable amount 293,000 – 3,000).

6. How much impairment loss should be recognized by each venture?

a. P10,000
b. P 3,000
c. P13,000
d. P 7,000

At December 31, 2016 the carrying amount is reduced to P290,000 (the lower of its recoverable amount and its
carrying amount before impairment (P300,000 cost). Each venturer recognizes impairment of P10,000 in profit
or loss for the year ended December 31, 2016.

7. On March 1, 2016 entities A and B each acquired 30% of the ordinary shares that carry voting rights at a general
meeting of shareholders of entity Z for P300,000. Entities A and B immediately agreed to share control over entity
Z.

On December 31, 2016 entity Z declared a dividend of P100,000 for the year 2016. Entity Z reported a profit of
P60,000 for the year ended December 31, 2016. At December 31, 2016 the recoverable amount of each venturers
investment in entity Z is P292,000 (fair value of P295,000 less cost to sell P3,000). Entities A and B uses the
equity method to account for its investment in entity Z. However, there is no published price quotation for entity
Z.

On December 31, 2016, entities A and B must each report its investment in entity Z at:

a. P285,000
b. P290,000
c. P288,000
d. P260,000

At December 31, 2016 entities A and B must each report its investment in entity Z at P285,000 computed as
follows:

Cost of investment P 300,000

Profit share (10/12 x P60,000) x 30% 15,000
Dividend income (30% x P100,000) ( 30,000)
Investment in entity Z, December 31, 2016 P285,000

Items 8 and 9 are based of the following data

On January 1, 2016 entities A and B each acquired 30% of the ordinary shares that carry voting rights at a general
meeting of shareholders of entity M for P100,000. The purchase price is equal to the fair value of 30% of entity
M’s identifiable assets less 30% of its identifiable liabilities. Entities A and B immediately agreed to share control
over entity M.

For the year ended December 31, 2016 entity M recognized a loss of P600,000. Entities A and B have no
constructive or legal obligation with respect of their jointly controlled entity’s loss and have made no payment on
its behalf.

Entity M recognized profit for the year ended December 31, 2016 of P800,000. There is no published price
quotation for entity M. Investments are accounted for using equity method.

8. At December 31, 2016 how much investment in entity M should be reported by each venturer?

a. P100,000
b. P –0—
c. P180,000
d. P 40,000

At December 31, 2015 each venture must measure its investment in entity M at P0 computed as follows:

Cost of investment P 100,000

Loss share ( 100,000)
Investment in entity M, December 31, 2015 P –0—

In 2016 each venture does not recognize (P180,000 of its share of entity’s M losses. The loss recognized by the
entity is limited to its investment of P100,000.

9. At December 31, 2016 each venture must measure their investment in entity M at:

a. P160,000
b. P100,000
c. P180,000
d. P –0—

At December 31, 2016 entities A and B must each measure their investment in entity M at P160,000 computed
as follows:

Cost of investment, 2015 P 100,000

Loss share, 2015 ( 100,000)
Profit share, 2016
Profit share, 2016 ( 30% x P800,000) P240,000
Unrecognized loss in 2015 ( 80,000) 160,000
Investment in entity M, December 31, 2016 P 160,000

Appendix Problem:

On January 1, 2016 entities A and B (the venturers) form a joint venture (entity X). Upon incorporation of entity
X, entities A and B each take up 50% of the share capital of entity X. In return for their interests in entity X entities
A and B each contribute P100,000 to entity X. Entity A contributes machine with a fair value of P100,000 and a
carrying amount of P80,000. Entity B’s contribution is P100,000 cash. The machine contributed by entity A has
an estimated useful life of 10 years with no residual value.

Entity X’s profit for the year ended December 31, 2016 is P30,000 (after deducting depreciation expense of
P10,000 on the machine contributed by entity A). Entity A account for his investment using the equity method.

10. What is the cost of investment of entity A on December 31, 2016?

a. P 90,000
b. P121,000
c. P105,000
d. P106,000

Investment of machine, January 1, 2016:

Carrying amount P 80,000

Realized gain (P100,000 - P80,000) 50% 10,000 P 90,000
Profit share (50% x P30,000) 15,000
Realized gain on machine (P10,000/10 yrs) 1,000
Investment account balance, December 31, 2016 P106,000

Appendix Problem:

11. On January 1, 2016 M and N each acquired 30% of the ordinary shares that carry voting rights at a general
meeting of shareholders of entity Z for P300,000. Contingent consideration probable to be paid by entity M is
measured reliably at P50,000. Entities M and N immediately agreed to share control over entity Z.

For the year ended December 31, 2016 entity Z recognized a profit of P400,000. On December 30, 2016 entity Z
declared and paid a dividend of P150,000 for the year 2016. At December 31, 2016 the fair value of each venturer’s
investment in entity Z is P425,000. However, there is no published price quotation for entity Z.

On December 31,2016 entity M sells goods for P60,000 to entity Z. At December 31, 2016 this goods were in in
the inventories of equity Z (they had not been sold by entity Z). Entity M sells goods at a 50 per cent mark-up on
cost. Entities M and N account for its investment in entity Z using equity method.

At December 31,2016 entity M would report its investment in entity Z at:

a.P419,000
b.P375,000
c.P363,000
d.P300,000

At December 31,2016 entity M would report its investment in entity Z at P419,000

Cost of investment, January 1,2016 (P300,000 + P50,000) P350,000

Profit share (30% x P400,000) 120,000
Unrealized profit (50/150 × P60,000) 30% (6,000)
Dividend income (30% x P150,000) 45,000
Investment in entity Z, December 31, 2016 P419,000

12. On January 1, 2016 entities X and Y each acquired 30 per cent of the ordinary shares that carry voting rights
at a general meeting of shareholders of entity O for P300, 000. Acquisition-related costs, such as broker and legal
fees paid amounts to P50, 000 by entity X. Entities X and Y immediately agreed to share control over entity O.
For the year ended December 31, 2016 entity O recognized a prof1t of P400,000. On December 30, 2016 entity
O declared and paid a dividend of P150,000 for the year 2016. At December 31, 2016 the fair value of each
venturer‘s investment in entity O is P425,000. However, there is no published price quotation for entity O.

In 2016 entity X purchased goods for P100,000 from entity O. At December 31, 2016 P60, 000 of the goods
purchased from entity O were in entity X‘s inventories ( they had not been sold by entity X) Entity O sells at a 50
per cent mark-up on cost.

Entities X and Y account for its investment in an entity O'using the equity method.

At December 31,2016 entity X would report its investment in entity O:

a. P469,000
b. P369,000
c. P419,000
d. P375,000

Cost of investment, January 1,2016 (P300,000 + P50,000) P350,000

Profit share (30% x P400,000) – (30% × P20,000) 114,000
Dividend income (30% x P150,000) 45,000
Investment in entity O, December 31, 2016 P419,000

Unrealized profit (50/150 x P60,000) P20,000