CHAPTER 4 Joint-Venture Accounts NORMALA SALIMIN
 

CHAPTER 4 JOINT VENTURE ACCOUNTS


 
  4.1      The Nature of Joint Venture Business
 
4.1.1      Description of The Term of ‘Joint Venture’
 
Joint venture is a collaboration of a business which is not permanent. It only runs one economic activity in one period until the objective is met. The collaboration will end once the objective / motive is implemented.
 
It is also a partnership limited to a particular venture. It does not make use of a firm’s name and the parties concerned will agree among themselves to contribute capital towards the venture and to share all profits or losses. For example a merchant trading might provide the ship, another goods and another capital, any profits or losses would be divided in accordance to an agreed ratio.
 
Joint venture can broadly classify into two systems.
 
One system of Joint Venture is where a separate set of books is opened and the transactions are recorded in a similar manner as that of a partnership.
 
The other system is that no separate set of books is opened to record the transactions. Each party will record his own transactions in his own books.
 
For this purposes, the party will open up account known as Joint Venture with __________ account. Provided that each investor recorded their own transaction only, the other party has to prepare the details of transaction which is already prepared in order to determine the profit or loss. All the transactions will be combined in the Memorandum Joint Venture Account. The memorandum is not a double entry system.
 
The memorandum joint venture account effects a profit and loss, each venturer calculates his share of profit or losses. This share is then entered in the double entry being completed between the profit and loss account and joint venture accounts.
 
After all this is completed, the balance on each party’s joint venture account represents the cash transfer required to close the venture. Naturally in total the debit and credit balances are either carried down into the next accounting period or settled by the appropriate bank/cash payment or receipt. The transfer is recorded in the books of each venture, double entry being completed between the cash/bank account and joint venture account.
 
 
4.1.2      Differences Between Joint Ventures And Partnership
 
Joint Venture Partnership *      Two or more persons have decided to enter into a business venture together without wishing to form a normal long term partnership. *      Two or more persons agree to join forces in some kind of business venture. *      Not permanent, normally will be closed once the objective is met. *      Long term operation, normally will be closed down due to several reasons, i.e. the death of a partner, bankruptcy etc. *      Each party can contribute in different ways to the venture. For example, one venture may provide finance, another purchase, while the third offers his marketing skills. *      All or parts of the partner will be involved in handling the business and can also contribute capital.
 
 
4.2      The Accounting Records For Joint Venture Business
 
4.2.1      Joint Venture Accounts
 
The journal entries will be:
 
Debit Anything the ventures put into the enterprise (e.g. Cash, purchases, expenses paid etc). Credit Anything the ventures take out of the enterprise (e.g. Sales and cash withdrawal, assets withdrawal etc.
 
 
In the book of P
Joint Venture with Q Account
Cash – purchases by P X Cash – sales by P X Cash – expenses by P X Debtors – credit sales by P X Bad debts (if no del crede commission) X Assets taken over X Sales commission X Assets a/c - Stock withdrawal X Profit and loss – P’s share of profit X     Cash – paid to Q X       XX   XX
 
In the book of Q
Joint Venture with P Account
Cash – purchases by Q X Cash – sales by Q X Cash – expenses by Q X Debtors – credit sales by Q X Bad debts (if no del crede commission) X Assets taken over X Sales commission X Assets a/c - Stock withdrawal X Profit and loss – Q’s share of profit X Cash from P X   X       XX   XX
 
 
4.2.2      Memorandum of Joint Venture
 
The memorandum joint venture account is not a double entry account. It is drawn up only to find out
a)      the shares of the net profit or loss, and
b)      to help calculate the amounts payable and receivable to close joint venture
 
Memorandum Joint Venture Account
Purchases a/c – total purchases by P & Q X Sales a/c – total receipt by P & Q X Expenses a/c – total expenses by P & Q X Debtors – credit sales by P & Q X Commission received by P & Q X Assets taken over by P & Q X Profit and loss:   Assets a/c - Stock withdrawal X    P’s profit X   X    Q’s profit X       XX   XX
 
Example 1 :
 
Filza Pvt Ltd and DYN Pvt Ltd are suppliers of instant seasoning in Selangor. Both companies have agreed to undertake a joint venture to introduce new products. Filza will supply the product and bear any expenses incurred. DYN will sell the product and receive cash, and also cover any relevant expenses. Profit and losses were to be shared equally. The followings are the relevant information regarding the transactions occurred:
 
  RM Filza borne the cost of the product 1,800 Filza paid wages 200 Filza paid storage cost 160 DYN paid cost of carriage 120 DYN paid selling expenses 320 DYN received cash from sales 3,200
 
Workings:
 
Step 1
 
Filza and DYN will prepare their own Joint Venture Account respectively. Filza will open the “Joint Venture Account with DYN” and vice versa. The double entry for this transaction was as follow:
 
In the book of Filza Pvt Ltd           Payment              Dt Joint Venture Account with DYN
                                                                                                                Ct Cash Account
                                                           Purchases           Dt Joint Venture Account with DYN
                                                                                                                Ct Purchases
 
In the book of DYN Pvt Ltd           Payment              Dt Joint Venture Account with Filza
                                                                                                                Ct Cash Account
                                                          Receipt                 Dt Cash Account
                                                                                                                Ct Joint Venture Account with Filza
 
In the book of Filza Pvt Ltd
 
Joint Venture with DYN Account
  RM   RM Purchases  1,800     Cash: Wages 200     Cash: Storage cost 160    
 
In the book of DYN Pvt Ltd
 
Joint Venture with Filza Account
  RM   RM Cash: carriage 120 Cash: Sales 3,200 Cash: selling expenses 320            
 
Step 2
 
The Memorandum Joint Venture Account is prepared in order to determine whether the company gains profit or suffer a loss. The distribution of profit or loss is made based on the agreed ratio which is to be shared equally. The details in the memorandum are the combination of every Joint Venture Account.
 
Memorandum Joint Venture Account
  RM   RM   RM Purchases     1,800 Sales 3,200 Wages     200     Storage expenses     160     Carriage expenses     120     Selling expenses     320     Profit:                Filza (½) 300              DYN (½) 300   600           3,200   3,200
 
 
Step 3
 
The profit obtained by Filza and DYN will be distributed in their accounts.
 
Filza’s book                         Profit     Dt Joint Venture Account with DYN
                                                                                Ct P&L
 
DYN’s book                         Profit     Dt Joint Venture Account with Filza
                                                                                Ct P&L
 
In the book of Filza Pvt Ltd
Joint Venture with DYN Account
  RM   RM Purchases  1,800 Balance c/d 2,460 Cash: Wages 200     Cash: Storage cost 160     P&L 300       2,460   2,460 Balance b/d 2,460 Cash from DYN 2,460
 
In the book of DYN Pvt Ltd
Joint Venture with Filza Account
  RM   RM Cash: carriage 120 Cash: Sales 3,200 Cash: selling expenses 320     P&L 300     Balance c/d 2,460       3,200   3,200 Cash paid to Filza 2,460 Balance b/d 2,460
 
EXERCISES
 
QUESTION 1
 
Haniz and Wandy, run the business together on the basis that the transaction gains and losses be divided equally. They do not have bank accounts and do not have any books that open a special account to record these transactions. Each of them will do the record transaction respectively. The following are the transactions:
Year 2010

Jan 31                    Haniz bought by cash at RM 1,200
Feb 28                   Haniz paid the fares at RM 20
Mac 15                 Wandy paid for storage expenses at RM 11
         25                 Wandy paid the insurance at RM 5
May 15                 Wandy selling goods for cash amounted RM 1,650
         29                 Wandy bought two equipment to cost RM 230 each for cash
June 26                 Haniz paid freight and insurance at RM 24
Jul 15                     Haniz paid repairs cost at RM 85
Aug 6                     Haniz sold equipment in cash RM 652
       21                    Haniz bought by credit at RM 230
Sept  18                Wandy paid freight and insurance at RM 10           25                 Wandy sold goods for cash RM 260

They had decided to discontinue the joint venture on 30 September 2010. You are required to prepare a joint venture statement (memorandum with the transaction) and show the ledger accounts in respect of the books Haniz and Wandy.

 
  QUESTION 2

 
Fauzi and Syamsul are iron merchants who each have their own business. They have agreed to work together and share profits or losses equally. The following are transactions carried out by both the 2013

Transactions                                                                 Fauzi (RM)                                       Syamsul (RM)
Iron purchased                                                                24,800                                                   18,900
Iron sales                                                                             37,700                                                   29,500
Store rental                                                                          2,400                                                     1,200
Transportation expenses                                               3,790                                                     1,950
General expenses                                                                580                                                         870
Purchase of vehicles                                                         5,200                                                          -
Utilities costs                                                                          560                                                         930


At the end of the transaction, it was found that there is unsold iron by Fauzi worth RM3,100 and RM1,090 by Syamsul. Both parties have agreed to take over the iron-steel and will be credited to their accounts. Fauzi and Syamsul also agreed to impose a charge of 5% on the overall profitability of their business for service charges and they run their business equally.


Required:
a. Account for transactions with the both parties
b. Memorandum account transactions with Fauzi and Syamsul with regard to all matters agreed
QUESTION 3
 
Tria and Elisa conduct joint ventures on the basis that profits and losses will be shared equally. Each party had a particular transaction in their books. Here are the transactions involved in the collaboration:

Year 2010

Jan 31                    Tria bought goods for cash, RM5, 200
Mar  28                 Tria paid transportation costs, RM95
May 15                                 Elisa paid storage costs at RM150
        25                   Elisa paid insurance expenses at RM100
Jun 6                      Elisa sold goods for cash, RM7, 000
       14                    Elisa bought a used computer with price RM1, 500 in cash
Jul 21                     Tria paid transportation costs, RM50
     23                      Elisa settled the cost of repairs, RM20
Aug 14                  Tria sold table in cash, RM75
Nov 3                    Elisa bought the goods for cash, RM3,000
       18                    Elisa paid the cost of fares, RM40
       19                    Tria sold goods for cash, RM7, 500

Tria and Elisa agreed to terminate the joint venture business on 30 November 2010. You are required to prepare a Statement of Joint Ventures (Memorandum of Joint Ventures) and show the ledger accounts in respect of the books Elisa and Tria.
 
Listen
Read QUESTION 4                                                                                       
 
Yee and Tee were business venture to buy and sell the bricks. They started the business on 2nd January 2011. They agreed to divide the profits or losses in proportion to the contribution of RM12,500. On April 4th, Tee has been taken brick to repair the house with an agreed amount of RM800. Because Yee has requested to know the development of their business, they agreed to calculate the amount of profits earned up to 30th June 2011. On closing date, the total number of bricks that were not been sold worth RM3, 800.

Additional Information:
(i)        Capital contributions by Yee RM7, 500 and Tee RM5, 000
(ii)       Order the brick manufacturers in the state of RM12, 900. Fares, insurance and unloading
            expenses of RM1, 500
(iii)      Gross Sales until June 30 is RM14, 370 and expenses associated with retail sales         
            amounting to RM285
(iv)       Interest on the agreed capital of 4% per year
(v)        Cash payments on loans  :  Yee of RM5, 000
                                                              Tee of RM3, 000
(vi)       They want to open a set of books for recording transactions and joint ventures.

Required to prepare a Memorandum of Joint Ventures and Joint Ventures account with Yee and Tee. Listen
Read phonetically
 
Dictionary - View detailed dicQUESTION 5
 
Upin and Ipin, run the business together on the basis that the transaction gains and losses be divided equally. They do not have bank accounts and do not have any books that open a special account to record these transactions. Each of them will do the record transaction respectively. The following are the transactions during year 2012 :


Jan 29                    Upin bought by cash at RM2,100
Feb 18                   Upin paid the freight and insurance at RM320
Mac 12                 Ipin paid for storage expenses at RM102
         15                 Ipin paid the freight and insurance at RM150
May 17                 Ipin sold goods for cash amounted RM 3,850
         24                 Ipin bought two small machine to cost RM1,270 each for cash
June 25                 Upin paid installation cost at RM117
Jul 18                     Upin paid repairs and maintenance cost at RM189
       26                    Ipin paid wages RM350.
Aug 16                 Upin sold a machine by cash RM1,000
        23                   Upin bought by credit at RM1,450
Sept  17                Ipin paid printing, stationery and postage  RM104           27                 Ipin sold goods for cash RM3,220

They had decided to discontinue the joint venture on 30 September 2012. You are required to prepare a joint venture statement (memorandum with the transaction) and show the ledger accounts in respect of the books Upin and Ipin.
 
QUESTION 6
 
Faris and Adib entered into a join venture for dealing in tropical fruit. They have agreed to work together and share profits or losses equally. The following are transactions connected with this venture :
 
Transaction Faris Adib   RM RM Land rented 3,000 - Purchase of seeds 2,500 4,300 Labour for planting 2,400 2,100 Motor expenses 235 1,200 Labour for fertilising 850 400 Labour for lifting 500 820 Sales received 5,050 3,780 Purchase machine 500 450 Sundries expenses 120 200

At the end of the transaction, it was found that there is stock unsold worth RM560 and both agreed to take over the stock equally. They also agreed to take over the machine that had been bought by them after reduce 10% depreciation.


Required:
a. Account for transactions with the both parties
b. Memorandum account transactions with Faris and Adib with regard to all matters agreed
 
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