Question 3: (30 marks)
On 1 July 2016 T Ltd enters into a joint venture arrangement with S Ltd establishing an incorporated B Ltd. company Both venturers commit themselves to a contractual arrangement in which T Ltd contributes plant and machinery with a fair value of $40million; S Ltd contributes cash of $20million and land with a fair value of $20million, which is considered to be a good site for the extraction of minerals. The cash that is contributed is used partly to acquire some additional machinery at a cost of $14million, with the balance of the cash on hand to meet operational requirements.
§ The machinery contributed by T Ltd has a book value of $42million (cost $60million; accumulated depreciation $18million), and a fair value of $40million
§ The land contributed by S Ltd has a book value of $16million and a fair value of $20million
§ All current and future contributions are to be based on a 50:50 split, as are the future distributions of output.
For the year ending 30 June 2017, the joint venture prepares the following balance sheet, cash flow statement and statement of production costs. To date, no minerals have been removed, although the venturers do consider that economically recoverable reserves exist. All production costs have been transferred to an asset account called deferred exploration and evaluation expenditure in anticipation of amortising the asset as production commences.
Statement of Costs of Production (For year ending 30 June 2017)
Direct Costs: 1600
Other costs 1200
Management fees 4400
Statement of Cash Flows (For year ending 30 June 2017)
Cash Flows from Operations:
§ Wages 1400
§ Materials 1000
§ Other costs 400
§ Management fees 400
Cash Flows from Investing Activities:
acquisition of machinery (3200)
Cash Flows from Financing Activities:
from joint venturer - S Ltd (14000)
Cash on hand 30 June 2017 20000
Joint Venture Balance Sheet (As at 30 June 2017)
Cash on hand 2800
Deferred exploration and evaluation expenditure 4400
Plant and machinery 54000
Total Assets 81200
Less: Current Liabilities 1 200
Accounts payable 80 000
Interests of venturers
T Ltd 40000
S Ltd 40000
Prepare the Journal entries in the records of T Ltd. and S Ltd. for the year ended 30 June 2017 in accordance with equity method of accounting.
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