MIDTERM Examination

Technological Institute of the Philippines - QC

Advance Financial Accounting
Tina Llorca

1. Which of the following is incorrect?

a. Consolidation of an investee shall begin from the date the investor obtains control of the investee
and cease when the investor loses control of the investee.
b. Control is the power to govern the financial and operating policies of an entity so as to obtain
benefits from its activities.
c. Changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing
control of the subsidiary are equity transactions (ie transactions with owners in their capacity as
owners).
d. An investor controls an investee when the investor is exposed, or has rights, to variable returns
from its involvement with the investee and has the ability to affect those returns through its
control.

2. Which is incorrect?
a. Financial statements in which the equity method is applied are not separate financial statements.
b. The financial statements of an entity that does not have a subsidiary associate or joint venturer’s
interest in a joint venture is automatically a separate financial statements.
c. An entity that is exempted from consolidation may present separate financial statements as its
only financial statements.
d. When an entity prepares separate financial statements, it shall account for investments in
subsidiaries, joint ventures and associates either at cost or in accordance with IFRS 9.

3. The ELI Corporation is undergoing liquidation and its statement of financial position as of January
2, 2013 is as follows:
ELI Corporation
Statement of Financial Position
As of January 2, 2013
Assets Liabilities and Equity
Cash P 124,200 Accounts Payable P 118,500
Receivables, net 340,800 Salaries Payable 50,000
Inventory 70,000 Bank Loan Payable 222,000
Prepaid Expenses 22,500 Note Payable 80,000
Building, net 360,000 Bonds Payable 450,000
Goodwill 82,000 Ordinary Shares 120,000
Capital Deficit (41,000)
Total Assets P 999,500 Total Liabilities and Equity P 999,500

The inventory has a realizable value of P53,000. Of the accounts payable, P60,000 is secured by 1/4 of the
receivable which is 30% not collectible. The balance in the book value of the receivables which has a
realizable value of P235,000 is used to secure the bank loan payable. The bonds payable is secured by the
building having a book value of P360,000 and a realizable value of P375,000.
Unrecognized liabilities as of Jan. 2, 2013 are as follows: accrued interest on bonds payable and taxes
amounting to P4,000 each, and trustee’s salary amounting to P9,500. (Use two decimal places for the
recovery percentage)
How much will be paid to the partially secured creditors of ELI corporation?
A. P477,595
B. P479,102
C. P478,349
D. P480,669

4. Par Company and Sub Company were combined in an acquisition transaction. Par was able to
acquire Sub at a bargain Pratt. The sum of the fair values of identifiable assets acquired less the
fair value of liabilities assumed exceeded the cost to Par. After eliminating previously recorded
goodwill, there was still some "negative goodwill." Proper accounting treatment by Par is to
report the amount as
a. paid-in capital.
b. a deferred credit, which is amortized.
c. an ordinary gain.
d. an extraordinary gain.
 5. On January 1, year 2, Pane Corp. exchanged 150,000 shares of its P20 par value common stock
for all of Sky Corp.’s common stock. At that date, the fair value of Pane’s common stock issued
was equal to the book value of Sky’s net assets. Both corporations continued to operate as
separate businesses, maintaining accounting records with years ending December 31. Pane uses
the equity method to account for its investment in Sky. Information from separate company
operations follows:
Pane Sky
Retained earnings—12/31/Y1 P3,200,000 P925,000
Net income—six months ended 6/30/Y2 800,000 275,000
Dividends paid—3/25/Y2 750,000 --
What amount of retained earnings would Pane report in its June 30, year 2 consolidated balance sheet?
a. P5,200,000
b. P3,250,000
c. P3,525,000
d. P4,450,000

6. Which of the following situations best describes a business combination to be accounted for as a
statutory merger?
a. Both companies in a combination continue to operate as separate, but related, legal entities.
b. Only one of the combining companies survives and the other loses its separate identity.
c. Two companies combine to form a new third company, and the original two companies are dissolved.
d. One company transfers assets to another company it has created.

7. A merger between a supplier and a customer is a(n)

a. friendly combination.
b. horizontal combination.
c. unfriendly combination.
d. vertical combination

8. During year 1, Pard Corp. sold goods to its 80%-owned subsidiary, Seed Corp. At December 31,
year 1, one-half of these goods were included in Seed’s ending inventory. Reported year 1
selling expenses were P1,100,000 and P400,000 for Pard and Seed, respectively. Pard’s selling
expenses included P50,000 in freight-out costs for goods sold to Seed. What amount of selling
expenses should be reported in Pard’s year 1 consolidated income statement?
a. P1,500,000
b. P1,450,000
c. P1,475,000
d. P1,480,000

9. Sun, Inc. is a wholly owned subsidiary of Patton, Inc. On June 1, year 1, Patton declared and
paid a P1 per share cash dividend to stockholders of record on May 15, year 1. On May 1, year
1, Sun bought 10,000 shares of Patton’s common stock for P700,000 on the open market, when
the book value per share was P30. What amount of gain should Patton report from this
transaction in its consolidated income statement for the year ended December 31, year 1?
a. P0
b. P390,000
c. P400,000
 d. P410,000
10. Port, Inc. owns 100% of Salem, Inc. On January 1, year 6, Port sold Salem delivery equipment at
a gain. Port had owned the equipment for two years and used a five-year straight-line
depreciation rate with no residual value. Salem is using a three- year straight-line depreciation
rate with no residual value for the equipment. In the consolidated income statement, Salem’s
recorded depreciation expense on the equipment for year 6 will be decreased by
a. 20% of the gain on sale.
b. 33 1/3% of the gain on sale.
c. 50% of the gain on sale.
d. 100% of the gain on sale.

11. In a business acquisition, consideration transferred includes which of the following?

I. The fair value of assets transferred by the acquirer.
II. The fair value of the liabilities incurred by the acquirer.
III. The fair value of contingent consideration transferred by the acquirer.
IV. The fair value of the equity interests issued by the acquirer as a part of the acquisition.
V. The fair value of share-based payments voluntarily exchanged for outstanding share-based
payment awards of the acquiree.
a. I and II.
b. I, II, and IV.
c. I, II, IV, and V.
d. I, II, III, and IV.

12. When does the measurement period end for a business combination in which there was
incomplete accounting information on the date of acquisition?
a. When the acquirer receives the information or one year from the acquisition date, whichever occurs
earlier.
b. On the final date when all contingencies are resolved.
c. Thirty days from the date of acquisition.
d. At the end of the reporting period in the year of acquisition.

13. The manila branch of the great company is billed for the merchandise by the Home office at 20%
above cost. The branch in turn prices merchandise for sales purposes at 25% above billed price.
On February 16 all of the branch merchandise is destroyed by fire. No insurance was maintained.
Branch accounts show the following information:
Merchandise inventory: January 1 (at billed price) 26,400
Shipments from home office (jan1-feb16) 20,000
Sales 15,000
Sales Returns 2,000
Sales allowances 1,000

As a result, how much loss will be recognized by the branch in its books as a result of the fire?
a. 36,000 b. 30,000 c. 36,800 d. 30,541

14. Jayhawk Company has numerous branches in the state of Kansas. The home office purchases
merchandise and makes shipments to branches from a central warehouse at the request of branch
managers. Which of the following would be an improper accounting practice?
 a. The Investment in Branch ledger account is debited in the accounting records of the home
office when merchandise is shipped to a branch, and the Shipments to Branch account is
credited (assume use of the periodic inventory system).
b. The home office debits Trade Accounts Receivable and credits Sales when merchandise
is shipped to a branch.
c. Cash received from a branch is credited to the Investment in Branch ledger account by
the home office.
d. Only the home office maintains a Common Stock ledger account and a Retained Earnings
account.

15. Which of the following ledger accounts is displayed in the combined financial statements for a
home office and branch?
a. Shipments to Branch
b. Home Office
c. Dividends Declared
d. Allowance for Overvaluation of Inventories: Branch

16. The home office of Irby Company bills merchandise to branches at 25% above home office cost.
Information taken from the accounting records of Kipp Branch is as follows:

Beginning inventories (at billed prices) $17,000

Shipments from home office (at billed prices) 42,500
Ending inventories (at billed prices) 20,000
Net loss for accounting period 1,500
The net income or net loss of Kipp Branch, based on home office cost of branch merchandise, is:
a. $7,900 net income
b. $9,400 net loss
c. $6,400 net income
d. $7,000 net income
e. Some other amount

17. New world Com. Operates a branch in Iloilo. Home office books provides sales amounting to
P3,065,000, purchases of 2,400,000, Shipments to Branch of 502,500, Freight in of 64,700,
Expenses of 976,000. Additional notes for the home office provides for it beginning inventory
amounting to 234,600 and an ending inventory of 357,800. On the other hand schedule provided
by the branch contained the following information; Sales- P670,500, Purchases-106,900,
Shipments from home office- 670,000 Freight in-18,200, Inventories 1/1 (60%from the HO billed
at 30% above cost)- 78,000, Inventories, 12/31 (40%from the HO)- 325,000

The ending inventory of the home office is excluding freight of P15,000 while the branch ending
inventory is excluding freight of P6,000.

Combined cost of goods available for sales?

a.3,572,400
b.2,699,300
c.2,891,600
d.2,808,700
 18. Cost of good sold of the branch?
a. 546,100
b. 400,300
c. 548,100
d. 402,300

19. Realized interbranch profit for the period

a. 145,800
b. 210,800
c. 148,300
d. 208,300

Fire Com. Has a branch in Makati and Rizal. The reciprocal accounts between the home office and in the
branches were in agreement at the beginning of 2012. However a December 31, 2012, Investment in
Makati has a debit balance of P186,500 and Investment in Rizal has a debit balance of 84,000 in the home
office books.

Data for reconciliation of the reciprocal are as follows:

A. On Dec. 29, 2012, the home office has instructed Makati to transfer P74,000 cash to Rizal.
Makati recorded this transaction immediately. Upon receipt, Rizal has recorded this transfer at
P47,000. The home office however has not yet recorded this inter-branch transaction as of the end
of the year.
B. Fire has transferred goods costing P28,900 to Makati branch and paid P2,500 of shipping cost on
Dec. 16, 2012. Makati shipped all of these goods to Rizal upon instruction of the home office on
Dec. 30, 2012. Shipping cost is P3,600 freight prepaid. Had the goods were shipped directly to
the Rizal P5,000 of the freight cost should have been incurred. The interbranch shipments was not
recorded by the branches and the home office as well.
C. Makati has collected cash of P5,750 from Rizal’s customer. This transaction is not yet recorded
by Rizal and the home office.
D. The home office already allocated P11,000 and p9,000 of administrative expenses to Makati and
Rizal respectively. The branches are not yet notified.
E. Makati remitted P14,300 cash to home office on Dec. 12, 2012. The home office has failed to
record the said remittance.
F. Rizal returned goods costing P6,850 to the home office. The goods were shipped on Dec. 19 and
received Dec. 24 but no entries have been made in the home office books.

Compute the following:

20. Unadjusted balance of the home office current account in Rizal’s books
A. P111,550
B. P122,000
C. P115,150
D. P84,850
21. Adjusted balance of investment in Rizal account
A. P181,450
B. P182,550
C. P175,700
D. P145,400

22. Excess freight on interbranch transfer of inventories?

a. P1,100
b. P2,500
c. P1,400
d. P3,600

23. On November 1, 2013, Goodbye To You (GTY) Inc.’s trustee prepares a Statement of Affairs with
the following information:
 P340,000 cash will be received by the unsecured creditors w/o priority whose claims totaled
P1,360,000

 A received a 12% note of P124,000 from GTY on March 1, 2013, secured with machinery with a
market value of P115,000
 GTY issued to B a 12%, 1-year note of P136,000 on January 1, 2013. Nothing has been pledged to
this note.

 C holds a note of P137,500 on which interest of P7,452 is accrued, secured with equipment with a
book value of P153,000. The fair value of the equipment is determined to be P173,250

 GTY still owes D, its cashier, with her salary worth P12,220

Which of the following statements about the creditors of Goodbye To You is false?
A. The unsecured creditor without priority will receive P37,400
B. The unsecured creditor with priority will receive P3,055
C. The fully secured creditor will be paid an amount of P144,952
D. The partially secured creditor will be paid an amount of P119,730

24. Which entry would be the correct entry on the not-for-profit organization’s books to record a
donor’s gift when power over the assets has been retainedby the donor?
A) debit expense-charitable contribution, credit cash.
B) debit refundable advance to charity, credit cash.
C) debit cash, credit liability to beneficiary.
D) debit cash, credit refundable advance.

25. Which entry would be the correct entry to record that a hospital has provided patient services for
$200,000, of which 25% will be billed to a third party?
A) debit Accounts Receivable-Patients $200,000, credit Patient Service Revenue $200,000.
B) debit Accounts Receivable-Patients $150,000, debit Accounts Receivable-Third Party $50,000, credit
Patient Service Revenue $200,000.
C) debit Accounts Receivable-Patients $50,000, debit Accounts Receivable-Third Party $150,000, credit
Patient Service Revenue $200,000.
D) debit Accounts Receivable-Patients $200,000, credit Patient Service Revenue $50,000, credit Patient
Service Revenue $150,000.

26. What is the appropriate account to debit when reducing patient billings caused by arrangements
with third party payors?
A) Contractual Adjustments.
B) Allowance for uncollectible and reduced accounts.
C) Patient Service Revenues.
D) Account Receivable-Patients.
 27. What is the appropriate account to credit when estimating a portion of receivables that will prove
to be uncollectible?
A) Bad Debt Expense.
B) Allowance for Uncollectible Accounts.
C) Patient Service Revenues.
D) Accounts Receivable.

28. Agency ABC sold a 50% depreciated motor vehicle which had an original cost of P 300,000 for
P 200,000. The proceeds shall be deemed automatically appropriated for the purchase of
replacement higher capacity vehicle worth P 500,000, net of applicable tax. The agency
subsequently received a NCA of P 500,000 for the purchase of said vehicle. What is the entry to
record the receipt from the disposal of the motor vehicle?
a. Cash- Collecting Officer ………………. 200,000
Due to BTr ………………………. 200,000
b. Cash- Collecting Offricer ……………... 200,000
Gain on Sale of Disposed Assets ... 200,000
c. Cash- Collecting Officer ………………. 200,000
Accumulated Depreciation – Vehicles ... 150,000
Motor Vehicles………………….. 300,000
Gain on Sale of Disposed Assets… 50,000
d. Cash- Collecting Officer ………………. 200,000
Accumulated Depreciation- Vehicles …. 150,000
Motor Vehicles………………….. 300,000
Due to BTr…………….………… 50,000

29. Using the information in Agency ABC, what is the entry to record remittance of the collection to
the BTr, if any.
a. No necessary entry, since there is no need to remit the collection to the BTr.
b. Gain on Sale of Disposed Assets …….. 50,000
Government Equity ………………….. 150,000
Cash- Collecting Officer……….. 200,000
c. Due to BTr …………………………… 200,000
Cash- Collecting Officer ………. 200,000
d. Subsidy Income from National Government 200,000
Cash- Collecting Officer ………. 200,000

30. Using the same information in Agency ABC, what is the entry to record the receipt of the NCA
for the purchase of new motor vehicle?
a. Memo Entry
b. Cash- National Treasury, MDS………. 300,000
Subsidy Income from National Government 300,000
c. Cash- National Treasury, MDS………. 450,000
Subsidy Income from National Government 450,000
d. Cash- National Treasury, MDS………. 500,000
Subsidy Income from National Government 500,000

31. Agency QQQ had the following account balances for the year 2011:
 Dr (Cr)
Cash……………………………………………………….. P 5,000,000
Receivables ……………………………………………….. 10,000,000
Marketable Securities …………………………………….. 18,000,000
Fixed Assets ……………………………………………… 95,000,000
Long-term investments …………………………………… 5,000,000
Other Assets ……………………………………………… 8,000,000
Inventories ………………………………………………... 7,000,000
Prepaid Expenses ………………………………………… 2,000,000
Accumulated Depreciation ………………………………. (5,000,000)
Determine the current assets for the year 2011:
a. 42,000,000 b. 95,000,000 c. P 145,000,000 d. P 55,000,000

32. Agency RRR had the following account balances for the year 2011:

Current Assets …………………………………………… P 10,000,000

Investment and Fixed Assets ……………………………. 90,000,000
Other Assets …………………………………………….. 5,000,000
Liabilities ……………………………………………….. 18,000,000
Contingent Liabilities …………………………………… 5,000,000
Contingent Assets ………………………………………. 3,000,000
Determine the Government Equity for the year 2011:
a. P 105,000,000 b. 85,000,000 c. P 87,000,000 d. 82,000,000

33. Reyes, Silva and Tan formed a Joint venture. Reyes was designated as the manager and was to
record the joint venture’s transactions in his own books. As a manager, Reyes was to be allowed a
salary of P12,000; the remaining profit or loss was to be divided equally.
The following balances appeared at the end of 2008, before adjustment for venture inventory and profit:
Debit Credit
Joint venture cash 48,000
Joint venture 15,000
Silva, Capital 1,000
Tan, Capital 27,000
The venture was terminated on December 31, 2008, and unsold merchandise costing P10,500 were taken
over by Tan. Reyes made cash settlement with Silva and Tan.
In the final settlement, how much did Tan receive?
a. 31,500 b. 27,000 c. 21,000 d. 10,500

34. Oliver Co. uses the installment-sales method. When an account had a balance of P8,400, no
further collections could be made and the dining room set was repossessed. At that time, it was
estimated that the dining room set could be sold for 2,400 as repossessed or for P3,000 if the
company spent P300 reconditioning it. The gross profit rate on this sale was 70%. The gain or
loss on repossession was a
a. 5,880 loss b. 6,000 loss c. 180 gain d. 600 gain

Coaster manufactures and sells logging equipment. Due to the nature of its business, Coaster is unable to
reliably predict bad debts. During 2012, Coaster sold equipment costing $3,600,000 for $5,400,000. The
terms of the sale were 20% down, with equal payments due quarterly over the next 3 years. All payments
for 2012 were made on schedule. Round answers to two places.
 35. Assuming that Coaster uses the installment method of accounting for its installment sales, what
amount of realized gross profit will Coaster report in its income statement for the year ended
December 31, 2014?
a. 1,680,000 b. 1,120,000 c. 560,000 d. 369,600

36. Assuming that Coaster uses the cost-recovery method of accounting for its installment sales, what
amount of realized gross profit will Coaster report in its income statement for the year-ended
December 31, 2015?
a. 0 b. 240,000 c. 316,800 d. 960,000

37. MM is trying to decide whether to accept a salary of P40,000 or a salary of P25,000 plus bonus of
10% of net income after salaries and bonus as a means of allocating profit among the partners.
Salaries traceable to the other partners are estimated to be P100,000. What amount of income
would be necessary so that MM would consider the choices to be equal?
a. 165,000 b. 290,000 c. 265,000 d. 305,000

38. A local partnership was considering the popssibility of liquidation since one of the partners is
solvent (Tillman) and the others are insolvent. Capital balances at that time were as follows.
Profits and losses were divided on a 4:2:2:2 basis, respectively.
Ding, capital 60,000
Laurel, capital 67,000
Ezzard, capital 17,000
Tillman, capital 96,000
Ding’s creditors filed a 25,000 claim against the partnership’s assets. At that time, the partnership held
assets reported at P360,000 and liabilities of P120,000.
If the assets could be sold for P228,000, what is the minimum amount that Ding’s creditors would have
received?
a. 0 b. 2,500 c. 36,000 d. 38,720

39. The Keaton, Lewis and Meador partnership had the following balance sheet just before entering
liquidation:
Cash 10,000
Non-cash assets 300,000
Total assets 310,000
Liabilities 130,000
Keaton, capital 60,000
Lewis, capital 40,000
Meador, capital 80,000
Total Liab and SHE 310,000

Keaton, Lewis, and Meador share profits and losses in a ratio of 2:4:4. Non-cash assets were sold for
P180,000. Liquidation expenses were 10,000. Assume that Keatin was personally insolvent with assets of
8,000 and liabilities of 60,000. Lewis and Meador were both solvent and able to cover deficits in their
capital accounts, if any. What amount of cash could Keaton’s personal creditors have expected to receive
from partnership assets?
a. 0 b. 26,000 c. 30,000 d. 34,000

40. In 2014, Kalye Construction Company was contracted to build the private road network of Alaya
Subdivision for P100 million. The project was expected to be finished in 2 years, and the contract
provided for:
- a five percent mobilization fee (to be deducted from the last billing), payable within 15 days from the
contract signing
- A retention provision of ten percent on all billings, payable with the final bill after the completed project
is accepted.
- payment of progress billings within 7 days from acceptance.

Kalye, which uses the percentage-of-completion method of accounting for income, estimated 25% gross
margin on the project. By the end of the year, Kalye had presented progress billings to Alaya
correesponding to 50% completion. Alaya accepted all the bills presented , excecpt one for 10% which
was accepted on January 5 of next year. With the exceotion of the second to the last billing for 8% which
was due January 3 of next year, all accepted billings were settled.
In 2014, Kalye Construction Company realized gross profit from the project the amount of:
a. 7,500,000 b. 10,000,000 c. 12,500,000 d. 25,000,000

41. Bonifacio contractors had s 3-year construction contract in 2012 for 900,000. The company uses
the percentage-of-completion method for financial statement purposes. Income to be recognized
each year is based on the ratio of cost incurred to total estimated cost to complete the contract.
Data on this contract follows:
Accounts receivable - Construction contract billings 30,000
Construction in progress 93,750
Less: Amount billed 84,375
10% retention 9,375

Net income reported in 2012 (before tax) 15,000

Bonifacio contractors maintains a separate bank account for each construction contract. Bank deposits to
this contract amounted tp P50,000.
What was the total estimated total income before tax on this contract?
a. 45,000 b. 144,000 c. 135,000 d. 94,000

42. In 2014, AJD construction company was contracted to build VIllage COmpany’s private road
networl for P100 million. The project was estimated to be completed in two years and the
contract provided for:
- mobilization fee (to be deducted from the last billing) payable within 15 days after the signing of the
contract.
- 10% retentio provision on all billings
- Payment of progress billings within 10 days from acceptance
AJD which uses the perecentage-of-completion method of accounting, estimated a 25% gross margin on
the project. By the end of 2014, AJD has presented progress billings corresponding to 50% completion.
All of the progrtess billings presented was accepted on January 5, 2015, except the last one for 10%
which was accepted on January 5, 2015. With the exception of one bill for 8% which was due on January
7, 2015, all of the billings accepted in 2014 were settled. Payments made by Village Company in 2014
amounted to:
a. 33,800,000 b. 38,500,000 c. 40,000,000 d. 45,000,000

43. Cherry, Inc. charges an initial franchise fee of P115,000, with 25,000 paid when the agreement
was signed and the balance in five annual payments. The present value of the future payments,
discounted at 10% is 68,234. The franchisee has the option to purchase P15,000 of equipment for
P12,000. Cherry has substantially provided all initial services required and collectibility of the
payments is reasonably assured. The amount of revenue from franchise fees is:
a. 25,000 b. 90,234 c. 93,234 d. 115,000

44. On December 31, 2014, PP inc. signed an agreement authorizing ZZ Company to operate as a
franchisee for an initial franchise fee of P50,000. Of this amount, 20,000 was received upon
signing of the agreement and the balance is due in three annual installment of P10,000 each
beginning December 31, 2015. The agreement provides that the down payment is not refundable
and no substantial future services are required to be perforemed. ZZ COmpany’s creidt rating is
such that the collection of the note is reasonably assured. The present value rate for a loan of this
type is P23,220. On December 31, 2014, PP, Inc. should record unearned franchise fee of
a. 0 b. 23,220 c. 30,000 d. 43,220

45. A hospital has the following account balances:

Revenue from newstand 50,000
Amount charged to patients 800,000
Interest income 30,000
Salary expense- nurses 100,000
Bad debts 10,000
Undesignated gifts 80,000
Contractual adjusmtments 110,000

What is the hospital’s net patient service revenue?

a. 880,000 b. 800,000 c. 690,000 d. 680,000

46. Lawyer's fees incurred during a reorganization are accounted for with a debit to
A) an expense.
B) an intangible asset, Reorganization Cost, which would normally be amortized over a five-year period.
C) additional paid-in capital.
D) a liability.

47. On a statement of financial affairs, a company's assets should be valued at

A) historical cost.
B) net realizable value, if lower than historical cost.
C) net realizable value, whether higher or lower than historical cost
D) net realizable value, if higher than historical cost.

48. On a statement of financial affairs, a company's liabilities should be valued at

A) the present value of future cash flows.
B) net realizable value.
C) the amount required for settlement.
D) the amount expected to be paid if the company could honor its debts.

49. Three companies (the venturers) jointly buy a 15-floor office building. Each floor in the building
has a separate legal title, which allows a floor to be sold separately. Each venturer takes title
(ownership) of five of the floors, one of which it uses for its own purposes. Each has a right to
use that one floor for whatever purpose it chooses. The venturers set up a company and each
transfers its ownership of four floors of the building to the company. The 12 floors are rented to
third parties. The company employs a management team to manage the rental business. The
company is controlled jointly by the venturers. The venturers are not liable for any costs of the
company.
How will the parties of the joint arrangement account for the above?
 a. Each venturer recognises its interest in one floor in accordance with applicable IFRSs, ie
IAS 17 Leases. The venturers also recognise their interest in the company using the
equity method.
b. Each partner recognises its interest in one floor. Each also recognises its investment in
the joint venture, using the proportionate method.
c. Each partner recognises its interest in one floor. Each also recognises its investment in
the joint venture, using the equity method.
d. The arrangement involves a joint asset. It is those rights that the parties control and would
recognise in accordance with applicable IFRSs.

50. An oil and gas company (B) has rights to carry on exploration activities in one field, and digs two
exploration wells. The company enters into an agreement with two other oil and gas companies
(C and D) to share the costs and risks associated with the exploration activities. C and D each
contribute CU2 million and in return receive a 25 per cent working interest in the exploration
field. All future costs of the exploration activities are shared 50:25:25 by the three parties to the
arrangement, with B being contractually responsible for 50 per cent of the total costs. B is
appointed as the operator. It purchases equipment, recruits employees and manages the
exploration activities in accordance with the agreement, approved annually by the three parties.
What type joint arrangement is the above?
a. The arrangement involves joint assets.
b. The arrangement involves joint operation.
c. The arrangement involves jointly controlled entity.
d. The arrangement involves joint venture.