Joint Arrangements - Uno Co. (IFRS) — Journal Entries (Year 1 and Year 2)

Saanvi Corp. (SC) and Mark Ltd. (ML) entered into a JV agreement and founded Aaron Inc. (AI) on January 1, Year 1. SC contributed $300,000 cash and equipment with a fair value of $700,000 in exchange for a 35% interest in AI. ML owns the remaining 65% interest.

Additional information:

• All transactions detailed were determined to have commercial substance.

• All companies share a common December 31 year end and report under IFRS.

• The net book value of the contributed equipment, which originally cost $1,000,000, is $900,000. It has a remaining useful life of four years, after which time the residual value is estimated to be $0. The fair value of the equipment represents its recoverable amount.

• AI reported net income of $160,000 for the year ended December 31, Year 1.

• During Year 1, AI declared and paid $80,000 in dividends to its JV partners.

At what amount will the investment be reported on SC’s SFP for the year ended December 31, Year 1?

The investment balance is calculated as follows:

Fair value of assets contributed: $300,000 + $700,000	$    1,000,000
Share of JV income: $160,000 × 35%	56,000
Share of JV dividend: $80,000 × 35%	(28,000)
Investment account balance on December 31, Year 1	$    1,028,000

One hundred percent of SC’s loss on the contributed equipment is recognized at the time of disposal, not deferred and amortized, and so has no impact on SC’s investment balance.

Bedmass Corp. (BC), a public company, owns a 20% interest in a joint operation. On its books, BC has its 100%-owned inventory with a book value of $250,000. The joint operation has inventory with a book value of $20,000.

What amount of inventory would BC report on its SFP at the end of the year?

The company would report inventory of $254,000 [$250,000 + ($20,000 × 20%)] representing 100% of BC’s inventory plus its portion of the joint operation’s amount.

Sherri Inc. and Terri Corp. are entering into a business arrangement to manufacture and sell piccolos. Which of the following best supports treatment of this business as a joint arrangement with joint control?

Decision-making requires the unanimous consent of Sherri and Terri

On April 1, Year 1, Calko Inc. contributed a patent to Clock Co., a JV. The patent had a book value of $70,000 and a fair value of $300,000. In return for the patent, Calko received a 35% interest in Clock. Assume that the transaction has commercial substance.

How much will Calko recognize as a gain on disposal related to this transaction at the time of investment? Assume Calko prepares its financial statements in accordance with IFRS.

Correct! Calko will report a gain on disposal for the portion sold to the other joint venturers. ($300,000 fair value – $70,000 book value) × (100% – 35% owned by Calko) = $149,500.

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Pear Ltd., Banana Corp., and Orange Inc. entered into a joint arrangement, the details of which follow:

• Pear, Banana, and Orange each own one-third of the new entity, Fruit Basket Co. (FBC).

• All decision-making at FBC requires an 80% vote to pass.

• FBC will purchase fruit from Pear, Banana, Orange, and other suppliers, and sell the fruit to grocery stores.

• The rights to FBC’s assets and liabilities are held within FBC itself.

• All entities prepare their financial statements in accordance with IFRS.

Which of the following best describes how the arrangement should be classified?

As a joint venture

On January 31, Year 1, Jestor Inc. and Victory Inc. formed a JV called JVC Ltd. Jestor invested plant and equipment with a carrying value of $500,000 and a fair value of $800,000 for a 30% interest in the venture. Victory contributed assets with a fair value of $2,000,000 (including $200,000 in cash) for a 70% stake in JVC. The fair value of the assets contributed by Victory was the same as their carrying value. All three companies report under IFRS. Assume that the transaction has commercial substance.

At what amount would Victory record its investment in JVC on January 31, Year 1?

This is the fair value of the consideration given up by Victory for its investment in JVC. - $2,000,000