Consignment and Joint Ventures Notes

Consignment Accounts-II Working Notes

• Calculation of CP of Goods Consigned
  • IP of the Goods Sent is Rs. 1,00,000 which is 25% above cost.
  • The CP shall be calculated as follows:
    • $IP = CP + P$ (25% on CP)
    • Let CP be X
    • $1,00,000 = X + \frac{25}{100} X$
    • $1,00,000 = X + \frac{1}{4} X$
    • $1,00,000 = \frac{4X + X}{4}$
    • $1,00,000 = \frac{5X}{4}$
    • $X = 1,00,000 \times \frac{4}{5}$
    • $X = 80,000$
    • CP = Rs. 80,000

Value of goods taken by the Consignee

• IP of goods taken = Rs. 10,000
• CP of goods taken $(10000 \times \frac{4}{5})$ = Rs. 8,000

Kabir’s Account

• Rs. 1,40,000 To Consignment to Ahmedabad A/c
• Rs. 9,000 To Consignment to Ahmedabad A/c (Expenses)
• Rs. 9,000 To Consignment to Ahmadabad A/c (Commission)
• Rs. 2,5000 By Bank A/c (Advance)
• Rs. 2,500 By Consignment to Ahmedabad A/c (sales)
• Rs. 4,200 By Consignment to Ahmedabad A/c (Balance)
• Rs. 1,26,300 By Balance c/d
• Total: 1,58,000 on both sides

Value of goods lost due to Consignee’s negligence

• These are to be valued at the cost plus 12.5% on cost.
• Hence, its value will be $= 8,000 + 1000 = Rs. 9,000$
• It will be worked in the same manner as the value of goods taken by the consignee.

LET US SUM UP

• In order to conceal the actual profit earned on consignment, sometimes the Consignor invoices the goods to the Consignee at a price which is higher than the cost, This is called invoice price (IP).
• The difference between the invoice price (IP) and the cost price (CP) is called loading.
• This affects four items shown in the Consignment Account viz (i) goods sent on Consignment; (ii) goods returned by the Consignee; (iii) opening consignment stock, and (iv) closing consignment stock.
• In order to work out the actual profit, the effect of loading on all these has to be nullified, otherwise the Consignment Account will show profit which is less than the profit actually earned.
• Loading can be found out by subtracting CP from IP.
• The calculation of loading is simple when both CP and IP are given.
• But it needs special attention when the loading is given as a percentage of CP or IP and only the figure of IP or CP is given.
• In such a situation, the formula will be $IP = CP+P$ is used for the calculation of loading or the cost price, or the invoice price, whichever is not given.
• For the adjustment of loading involved in different items, we have to pass the necessary journal entries in the books of the Consignor.
• However, the books of the Consignee are not affected by this because his books do not include an entry in respect of the four items involved.

KEY WORDS

• Invoice Price: The price at which the Consignor invoices the goods to the Consignee. It is usually higher than cost price.
• Loading: Difference between the Invoice Price and the Cost Price.

ANSWERS TO CHECK YOUR PROGRESS

• 1. i) False ii) True iii) False iv) True v) False vi) False
• 2. Difference between IP and CP
• 3. i) goods sent on consignment ii) goods returned by the Consignee iii) opening consignment stock iv) closing consignment stock
• 4. i) Rs. 600 ii) Rs. 200 iii) Rs. 625 iv) Rs. 225 v) Rs. 250
• 5. i) Rs.400 ii) Rs. 120 iii) Rs. 150 iv) Rs. 120 v) Rs. 100

TERMINAL QUESTIONS/EXERCISES: Questions

• 1. What do you understand by invoice price? Give reasons for consigning the goods at the invoice price.
• 2. What is loading? How do you compute it? Give examples.
• 3. Name items which are recorded at the invoice price in the Consignment Account. Give journal entries passed for the adjustment of loading in respect of each item.

Exercises

• 1. Vijay & Co. of Kolhapur consigned 2,000 bicycles on July 18, 2018 to Chaudhari of Madras for sale on the following conditions.
  • a) Cycles may be sold at invoice price or above
  • b) Chaudhari is entitled to a commission of $17 \frac{1}{2}$ % on invoice price of goods sold and 20% on an excess over the invoice price.
  • The cost of each cycle was Rs. 300 and it was invoiced at cost plus $33 \frac{1}{3}$
  • Vijay & Co. incurred Rs. 20,000 on freight and insurance. Chaudhari received the consignment on July 14, and accepted a 3 months bill drawn on him by Vijay & Co. for Rs. 2,00,000. Chaudhari paid Rs. 8,000 as custom duty and Rs. 5,000 as insurance and rent for the godown. They sold 1,600 cycles at Rs. 500 each.
  • Give ledger accounts as they would appear in the books of Vijay & Co. and Chaudhari.
  • (Answer: Profit Rs. 2,12,600; Stock at invoice price Rs. 1,65,600; Amount due from Shri Chaudhary Rs. 5,07,000)
• 2. On June 10, 2018, Raj & Co. of Bombay consigned 100 cases of Red Wine to Singham Bros. of Ceylon. The cost of the consignment amounted to Rs. 7,500 but the goods were charged at invoice price so as to show a profit of 25% on invoice price. On the same date, the Consignor paid Rs. 600 for freight and insuranèe. On July 1, the Consignee paid Rs. 1,000 for import duty, Rs. 200 for dock dues, and remitted a bank draft for Rs. 4,000 as an advance against the consignment. On July 15, they sold
• 3. Modi Textiles, Delhi consigned to Vinod Enterprises, Calcutta 100 cotton bales. The invoice price of each bale was Rs. 1,500 which includes 20% profit on invoice price. The Consignor paid Rs. 2,500 for insurance and Rs. 4,000 for carriage and freight. The Consignee received cotton bales and sold 75 bales for cash and realised Rs. 1,12,500. He incurred Rs. 1,800 on godown rent and was allowed 10% conmission on sales. 5 cotton bales were spoiled in godôwn and they are to be valued at 50% depreciation. Show Consignment Account in the books of Modi Textiles.
  • Hint: The damaged goods are also to be included in stock and they will be valued at 50% of the invoice price and the proportionate expenses.
  • (Answers: Profit Rs. 1,412; Value of stock Rs. 35,212 (including Rs. 3,912 for damaged goods); Amount due from the Consignee Rs. 99,450)
• 4. On January 1, 2018 the Consignment to Ceylon A/c in the books of Unique Clock Makers showed a debit balance of Rs. 3,750. This is represented by the invoice value of 50 clocks which is 25% above cost. On January 7, they sent another consignment of 2,500 clocks at the invoice price of Rs. 75 each which was 25% above cost. They paid Rs. 1,000 for packing, Rs. 500 for insurance and Rs. 3,000 for carriage and freight. Rama watch Co. the Consignee, received the clocks on January 21 and paid Rs. 3,000 for custom duty, clearing, etc. They also sent a bank draft for 50% of the invoice price of the goods received. On June 15, they returned 50 clocks which were found defective.
  • By December 31, 2018 they sold the opening stock of 50 clocks at Rs. 85 each on credit and 2,400 clocks of the new Consignment at Rs. 90 each. Their expenses were: advertising Rs. 2,000, salaries Rs. 2,000, and service charges Rs. 250.
  • The Consignee is entitled to a commission of 8% on sales. The Consignee could not recover Rs. 250 on account of credit sales. Show the necessary ledger accounts in the books of both the parties.
  • (Answer: Profit Rs. 43,780; Value of closing stock Rs. 3,900; Amount due from Consignees Rs. 1,01,630)
• 5. ‘A’ of Agra consigned 100 units of a commodity to ‘D’ of Delhi. The goods were invoiced at Rs. 150 per unit so as to yield a profit of 50% on cost. A incurred Rs. 1.000 on freight and insurance, while D incurred Rs. 500 on freight and Rs. 800 on rent. Before December 31. 2018 he sold 50 units for cash at Rs. 160 per unit and 20 units on credit for Rs. 175 per unit. He retained his commissions at 5% and 1% del credre on all sales and remitted the balance on December 31, 2018. D noticed that 10 units were damaged on account of bad packing and could sell them

Joint Venture Accounts

Objectives

• Explain the meaning and importance of a joint venture.
• Distinguish joint venture from partnership and consignment.
• Record joint venture transactions in the books of one venture.
• Record joint venture transactions in the books of all venturers.
• Prepare Memorandum Joint Venture Account; and
• Prepare separate set of books for the joint venture business.

Introduction

• Joint venture involves persons joining hands to carry out a specific job or project.
• Each person (co-venturer) wants to ascertain their share of profit or loss.
• Transactions are recorded in their own books or in a separate set of books.

What is a Joint Venture?

• When two or more persons join together to carry out a specific business venture and share the profits on an agreed basis, it is called a ‘joint venture’.
• Each one of them who join as a party to the joint venture is called ‘Co-venturer’.
• No firm name is normally used for the joint venture business because its duration is limited to a short period.
• During this period, the co-venturers are free to carry on their own business as usual, unless agreed otherwise.
• The Business relationship amongst the co-venturers comes to an end as soon as the venture is completed.
• Thus a joint venture is some kind of a temporary partnership between two or more persons who have agreed to jointly carry out a specific venture.
• The joint ventures are quite common in construction business, consignment, sale and purchase of property, underwriting of shares and debentures, etc.
• For example, A and B agreed to construct a college building for which they pooled their resources and skill. A provided Rs. 6 lakh and B Rs. 4 lakh as capital. They completed the building and shared the profits in the ratio of their contributions to capital. In this example, joining hands by A and B to construct a building is a joint venture. A and B are co-venturers. They will share the profits in the ratio of 6 and 4 (same as the ratio of their capitals).

Essential Features of a Joint Venture:

1. It is formed by two or more persons.
2. The purpose is to execute a particular venture or project.
3. No specific firm name is used for the joint venture business.
4. It is of a temporary nature. Hence, the agreement regarding the venture automatically stands terminated as soon as the venture is completed.
5. The co-venturers share profit and loss in the agreed ratio. However, in the absence of any other agreement between the co-venturers, the profits and losses are to be shared equally.
6. During the tenure of joint venture, the co-venturers are free to continue with their own business unless agreed otherwise.

Main Advantages of a Joint Venture:

1. Sufficient Resources: Since two or more persons pool their resources, there is sufficient capital available.
2. Ability and Experience: In joint venture the different venturers may be having different skills and experience. The benefit of their common wisdom will be available to the venture.
3. Spreading of Risk: The co-venturers agree to share the profits and losses in a particular ratio. This implies that the risk is also borne by them in that ratio.

Joint Venture and Consignment

JOINT VENTURE AND PARTNERSHIP

ACCOUNTING TREATMENT

Broadly speaking, accounts of a joint venture business can be kept in any one of the following four ways:

1. In the Books of One Co-venturer:
   • Only one venturer records the transactions in his books, opening a Joint Venture Account and personal accounts for other co-ventures.
2. In the Books of All the Co-venturers:
   • Each Co-venturer opens a Joint Venture Account and personal accounts of other Co-venturers, informing each other about transactions.
3. Memorandum Joint Venture Account:
   • Each Co-venturer records only transactions directly concerned with him.
   • A Memorandum Joint Venture Account is prepared to calculate profit or loss.
4. Separate Set of Books:
   • A separate set of books are maintained for the joint venture, including a Joint Bank Account, a Joint Venture Account, and personal accounts of the co-venturers.

Recording in the Books of One Co-venturer

• Task of recording transactions can be entrusted to one of the Co-venturers.
• He will prepare a Joint Venture Account and the personal accounts of other Co-venturers.
• The Joint Venture Account is prepared for ascertaining the profit or loss of the joint venture.
• The personal account of other co— venturers are prepared to find out the amount due from them.
• each co-venturer is also entitled to carry on his own business and these transactions will be in addition to what he records in respect of his own business.

Journal Entries

1. When the co-venturers send their contribution:
   • Cash/Bank A/c Dr.
   • To Co-venturer’s Personal A/c
2. When the goods are purchased for the joint venture:
   • Joint Venture A/c Dr.
   • To Cash/Bank A/c
3. When the goods are supplied from his own stock:
   • Joint Venture A/c Dr.
   • To Purchases A/c
   • If goods are supplied at a price other than cost price, credit the Sales Account instead.
4. When the goods are supplied by other Co-venturers:
   • Joint Venture A/c Dr.
   • To Co-venturer’s Personal A/c
5. When some expenditure is incurred:
   • Joint Venture A/c Dr.
   • To Cash/Bank A/c
   • If expenses are paid by a Co-venturer, credit the Co-venturer’s Personal A/c.
6. When the Co-venturer sells the goods:
   • For cash sales: Cash/Bank A/c Dr. To Joint Venture A/c
   • For credit sales: Debtor’s Personal A/c Dr. To Joint Venture A/c
7. When cash is received from debtors:
   • Cash/Bank A/c Dr.
   • To Debtor’s Personal A/c
8. When discount is allowed or bad debts are incurred:
   • Joint Venture A/c Dr.
   • To Debtor’s Personal A/c
9. When sales are made by other Co-venturers:
   • Co-venturer’s Personal A/c Dr.
   • To Joint Venture A/c
10. When cash or bills receivable are received from other Co- venturers:
    • Cash/Bank/Bills Receivable A/c Dr.
    • To Co-venturer’s Personal A/c
11. When the Co-venturer is entitled to some commission or salary:
    • Joint Venture A/c Dr.
    • To Commission/Salary A/c
12. When unsold stock is taken over by the co-venturer recording the transactions:
    • Purchases A/c Dr.
    • To Joint Venture A/c
    • If taken by another co-venturer, debit Co-venturer’s Personal A/c.

Profit or Loss

• The balance of the Joint Venture Account shows profit or loss is shared by all the Co-venturers in their profit sharing ratio.

1. If it shows profit:
   • Joint Venture A/c Dr.
   • To Profit & Loss A/c (his own share)
   • To Co-venturers’ Personal A/cs (individually for their shares)
2. If it results in loss:
   • Profit & Loss A/c Dr. (his own share of loss)
   • Co-venturers’ Personal A/c Dr. (individually for their shares)
   • To Joint Venture A/c

Amount Due

• When the amount due to other Co-venturers is sent:
  • Co-venturers’ Personal A/c Dr.
  • To Cash/Bank A/c

Recording in the Books of all Co-venturers

• All transactions are recorded in the books of all the Co-venturers.
• Each Co-venturer sends information about their dealings to others. Similar entries are made in each Co-venturer’s books, who all open personal accounts of other Co-venturers.

Memorandum Joint Venture Account Method

• Each co-venturer records only transactions directly concerned with them.
• Each Co-venturer opens a Joint Venture Account including the name of other Co-venturer. For example, if ‘A’ and ‘B’ are partners, then in the books of ‘A’ it will be termed as ‘Joint Venture with ‘B’ Account’.
• Each Co-venturer will record only such transactions which are actually effected by him.
• personal account will not disclose the profit or loss of the venture. For that purpose we prepare an additional account called, ‘Memorandum Joint Venture Account’.
• This is like Profit and Loss A/c and entries will be passed in each Co-venturer’s books.

Interest in Joint Venture Transactions

• Calculate interest at a certain rate. Each Co-venturer is entitled to received interest on the amounts invested by him and pay interest on the amounts received by him.
• Only the net interest receivable from or payable to the Co-venturer is recorded in the Joint Venture Account.

Separate Set of Books

• Co-venturers keep a separate set of books for recording the joint venture transactions, an accounting entity on the basis of double entry principles.

Accounts Opened:

1. Joint Bank Account
2. Joint Venture Account
3. Personal accounts of each Co-venturer

• Joint Bank Account is a real account.
• Joint Venture Account is like a profit and loss account.
• The personal accounts of co-venturers show their contributions and any amounts they received.

Journal Entries:

1. When co-venturers contribute capital:
   • Joint Bank A/c Dr.
   • To Co-venturers Personal A/c
2. When a Co-venturer contributed in the form of goods:
   • Joint Venture A/c Dr.
   • To Co-venturers Personal A/c
3. When purchases are made:
   • If on cash: Joint Venture A/c Dr. To Joint Bank A/c
   • If on credit: Joint Venture A/c Dr. To Creditor’s Personal A/c
4. When expenses are incurred:
   • If paid out of Joint Bank Account Joint Venture A/c Dr. To Joint Bank A/c
   • If paid by a co-venturer Joint Venture A/c Dr. To Co-venturer’s Personal A/c
5. When goods are sold:
   • For cash sales: Joint Bank A/c Dr. To Joint Venture A/c
   • For credit sales: Debtor’s Personal A/c Dr. To Joint Venture A/c
6. When creditors are paid:
   • Creditors’ Personal A/c Dr.
   • To Joint Bank Account
7. When amounts are received from debtors:
   • Joint Bank A/c Dr.
   • To Debtor’s Personal A/c
8. Any commission, interest, etc. payable to a Co-venturer:
   • Joint Venture A/c Dr.
   • To Co-venturer’s Personal A/c
9. Unsold stock taken over:
   • Co-venturer’s Personal A/c Dr.
   • To Joint Venture A/c

Profit or Loss

• The Joint Venture Account will disclose the amount of profit or loss

1. In case of profit:
   • Joint Venture A/c Dr.
   • To Co-venturers’ Personal A/cs
2. In case of loss:
   • Co-venturers’ Personal A/c Dr.
   • To Joint Venture A/c

After transferring the amount of profit or loss

• Co-venturers’ Personal A/cs Dr.
• To Joint Bank A/c

Treatment of cash discount:

• Creditor’s Personal A/c Dr. To Joint Venture A/c
• When some cash discount is allowed to the debtors, it will be an item of loss for the joint venture and, therefore, is debited to the Joint Venture Account. The journal entry will be: Joint Venture A/c Dr. To Debtor’s Personal A/c

Underwriting of Shares

• The shares thus received are sold to the public or taken over by the Co-venturers at an agreed price.