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Question 3: (30 marks) On 1 July 2016 T Ltd enters into a joint venture arrangement with S Ltd establishing an incorporated B Ltd.

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.

Additional information:

§ 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)

$000

Direct Costs: 1600

Wages 1200

Materials 400

Other costs 1200

Management fees 4400

 

Statement of Cash Flows (For year ending 30 June 2017)

 

$000

$000

Cash Flows from Operations:

Payments

§ 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

 

2800

 

Joint Venture Balance Sheet (As at 30 June 2017)

 

$000

Current Assets:

Cash on hand 2800

Deferred exploration and evaluation expenditure 4400

 

Non-current Assets:

Plant and machinery 54000

Land 20000

 

Total Assets 81200

 

Less: Current Liabilities 1 200

Accounts payable 80 000

 

Net Assets

 

Represented by:

Interests of venturers

T Ltd 40000

S Ltd 40000

80000

 

Required:      

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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