Advanced Financial Accounting II Admas University

Lecture Note 2023

Chapter One
Accounting for Joint Venture and public Enterprises
1.1 Nature of Joint Ventures Businesses
A joint venture is a contractual arrangement whereby two or more parties called ventures undertake
an economic activity that is subject to joint control. Joint control is the contractually agreed sharing
of control over an economic activity, and exists only when the strategic financial and operating
decisions relating to the activity require the unanimous consent of the parties sharing control (the
ventures).
In today’s business community, joint ventures are less common but still employed for many projects
such as:
 The acquisition, development, and sale of real property
 Exploration for oil and gas
 Construction of bridges, buildings, and dams
CHARACTERISTICS OF JOINT VENTURES
1. Agreement
The terms and conditions of the joint ventures are enforced on a written treaty having the signature of
all the parties involved.
2. Parties
Those individuals included in the joint venture are known as co-venturer. Their number varies from
two to more than two. These are the individuals who will do this business under the joint venture.
3. No Separate Laws
There is no independent regulating body which governs the activities of the joint venture. There is no
separate law or governing bodies which can take part in the joint venture.
4. Duration
Joint ventures are for a short period and are not permanent. The duration depends upon the choices of
all parties involved in joint ventures.
6. No Special Name for the Venture
Since the federation is for a short period, any special and unique name is not required. The companies
or parties can utilize their already used name, and the venture could be named based on the opinion of
all parties.
7. Shared Control over the Venture
All the parties involved in a joint venture have shared control over it. All the important decisions and
factors will be enforced only after the agreement or per the terms and conditions quoted in an
agreement.
8. New Innovation

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Advanced Financial Accounting II Admas University
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As the parties use their technologies and human resources for the newly formed joint venture, there is
the possibility of innovating new technology which was not in their mind. Maybe that innovation will
be helpful for them as well as the customers of their brand.
9. Shared Resources
All the companies involved in the joint venture have to share their possessions, whether physical,
workforce or any other possession, to move their planned project ahead.
10. Sharing of Risk and Profits
The Differences between Joint Venture and Partnership
No Basis Joint venture Partnership
1 Name of the Venture Joint Venture does not have any Partnership has its own name of
name of running business. running business.
2 Name of the members Members in Joint Venture are Co- Members in partnership firm are
Ventures partners
3 Nature of objectives Temporary / short term objectives are Long term objectives are set in
set in joint venture partnership firm
4 Registration of firm No registration of business under any Registration is optional, but available
law
5 Books of accounts No separate set of books are Separate sets of books are maintained
maintained in the books of joint in the books of partnership firm.
venture except jointly controlled
entities
6 Freedom for additional Co-ventures have freedom to do Partners do not have a freedom to do
business similar business and complete similar business and complete
7 Dissolution Joint venture is dissolved as soon as Partnership is dissolved only at the
its work has been completed mutual opinion of partners
8 Maintenance of Not mandatory Mandatory
separate set of books
9 Scope Limited to single project Not limited to single project
TYPES OF ACCOUNTING FOR JOINT VENTURES
There are 3 types of joint Venture
1. JOINTLY CONTROLLED OPERATIONS
 Is one which involves the use of assets and other resources of the ventures, rather than the
establishment of a corporation, partnership or other entity, or a financial structure, that is
separate from the ventures themselves.
 These are Joint ventures, where the two separate entities use assets and inventories rather than
collaborate.
 Each venture uses its own property, plant and equipment and carries its own inventories. Each
venturers recognizes the assets it controls, the liabilities it incurs, the expenses it incurs, and its

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Advanced Financial Accounting II Admas University
Lecture Note 2023
share of the operation's income.
 Each venturer uses its own assets, incurs its own expenses and liabilities, and raises its own
finance.
Example 1. To illustrate assume that Company X and Company Y decides to enter into a joint
venture arrangement to produce a new product. Company X undertakes one manufacturing process
and Company Y undertakes the other. X and Y each bear their own expenses and take an agreed share
of the sales revenue from the product. Furthermore, they jointly market and distribute the finished
product using each venture's resources such as its property, plant and equipment, technical expertise
and employees.
 In this specific example we can understand that the two venturers (X and Y) are simply agreed
to contribute perform the undertaking without contributing any assets to form a new business.
The ventures at the end of the venture agreed to share profit and losses according to their
agreement.
Examples 2 jointly controlled operation
Entity A researches and develops drugs. Entity B manufactures drugs and promotes them
commercially. Entities A and B enter into a contractual arrangement whereby they equally participate
in the results of research and development and the commercial promotion of a particular drug that is
yet to be invented.
In accordance with the contractual arrangement entity A undertakes the research and development
activities and entity B undertakes the manufacturing and commercial activities. The entities share all
costs and revenues arising from the jointly controlled operation.
Entities A and B have joint control over the specified research, development, manufacturing and
commercial activities—it is a joint venture (jointly controlled operation). Each venturer (ie entities A
and B) is required to account for its interest in the jointly controlled operation
In respect of its interests in jointly controlled operations, a venturer shall recognize in its financial
statements:
(a) The assets that it controls and the liabilities that it incurs, and
(b) The expenses that it incurs and its share of the income that it earns from the sale of goods or
services by the joint venture.

Example 3 – accounting for a jointly controlled operation

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Advanced Financial Accounting II Admas University
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Assume contractual arrangements of entities A and B are jointly contracted with the government for
delivery of the motorway in return for 14 million (a fixed price contract).
In 20X1, in accordance with the agreement between entities A and B:
 Entities A and B each used their own equipment and employees in the construction activity
 Entity A constructed three bridges needed to cross rivers on the route at a cost of 4,000,000.
 Entity B constructed all of the other elements of the motorway at a cost of 6,000,000 . Entities
A and B shared equally in the 14,000,000 jointly invoiced to (and received from) the
government.
 The arrangement is a jointly controlled operation. Entities A and B have retained control of
the assets they use to perform the contract requirements and are responsible for their
respective liabilities. They meet their respective contractual obligations by providing
construction services to the government.
Entities A and B recognize in their financial statements their own property, plant and equipment and
operating assets and their share of any liabilities resulting from the joint arrangement (such as
performance guarantees). They also recognize the income and expenses associated with providing
construction services to the government.
The venturers account for their interests in the joint venture (jointly controlled operation) as follows:

Entity A—in 20X1

construction costs 4,000,000
Cash/Accumulated depreciation/Trade payables 4,000,000
To recognize the construction costs incurred in 20X1.
Cash 7,000,000
construction revenue 7,000,000
To recognize the construction revenue earned in 20X1.
Entity B—in 20X1
construction costs) 6,000,000
Cash/Accumulated depreciation/Trade payables 6,000,000
To recognize the construction costs incurred in 20X1.
Cash 7,000,000
construction revenue 7,000,000

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Lecture Note 2023
To recognize the construction revenue earned in 20X1.

2. JOINTLY CONTROLLED ASSETS

 is arrangement in which two or more parties jointly own property, and title is held individually
to the extent of each party’s interest.
 Such ventures do not involve the establishment of an entity or financial structure separate from
the ventures themselves, so that each venture has control over its share of future economic
benefits through its share in the jointly controlled assets.
 Jointly controlled assets involve the joint control, and often the joint ownership, of assets
dedicated to the joint venture.
Example1. Assume that ABC-Company and XYZ-Company enter into a contract to undertake oil
exploration and to build an oil pipeline. ABC-Company is responsible to purchase machineries and
construct buildings for office purposes, while XYZ-Company is responsible to build the oil pipeline.
 As you can see from the illustration the two companies agreed to contribute assets to the joint
venture under taking but not have any intention to form a new business organization. In
simple talking, the venturers perform the activities of the joint venture by using the
contributed assets of the venture. The income generated from the operations of the joint
venture is shared between them according to their agreements.
Example2—jointly controlled asset
Entities A and B are independent oil production companies. They enter into a contractual
arrangement to control and operate an oil pipeline jointly.
Each venturer uses the pipeline to transport its own product in return for which it bears an agreed
proportion of the expense of operating the pipeline.
The two entities A and B have joint control over the oil pipeline—it is a joint venture (jointly
controlled asset). Each venturer (ie entities A and B) is required to account for its interest in the
jointly controlled pipeline.
In respect of its interest in a jointly controlled asset, a venturer shall recognise in its financial
statements:
(a) Its share of the jointly controlled assets, classified according to the nature of the assets;
(b) Any liabilities that it has incurred;
(c) Its share of any liabilities incurred jointly with the other venturers in relation to the joint venture;
(d) Any income from the sale or use of its share of the output of the joint venture

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Advanced Financial Accounting II Admas University
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(e) Any expenses that it has incurred in respect of its interest in the joint venture.
Example 3 – accounting for a jointly controlled asset
On 1 January 20X1 entities A, B, C, D and E (the venturers) jointly buy a jet aircraft for 10 million
cash. The venturers are the registered as equal joint owners of the aircraft. They enter into an
agreement whereby the aircraft is at the disposal of each venturer for 70 days each year. The aircraft
is in maintenance for the remaining days each year. The venturers may decide to use the aircraft, or,
for example, lease it to a third party.
Decisions regarding maintenance and disposal of the aircraft require the unanimous consent of the
venturers.
The contractual arrangement is for the expected life (20 years) of the aircraft and can be changed only
if all of the venturers agree. The residual value of the aircraft is nil.
In 20X1 the venturers each paid 100,000 to meet the joint costs of maintaining the aircraft and 50,000
on pilot fees, aviation fuel and landing costs).
In 20X1 entity A also earned rental income of 10,000 by renting the aircraft to others.
The jet aircraft is a jointly controlled asset. The joint venture is a way to share the costs of having
access to an aircraft. Each venturer owns a share of the aircraft and benefits from having the aircraft
at its disposal for some days each year. Each venturer would recognise its interest in the jointly
controlled asset.
For example, in 20X1 entity A would record its interest as follows
1 January 20X1
Property, plant and equipment - in an aircraft 2,000,000
Cash 2,000,000
To recognize the purchase of an ownership-interest in a jointly controlled aircraft
In 20X1
Cash 10,000
rental income 10,000
To recognise income earned in renting to others the use of the aircraft in 20X1.
aircraft operating expenses 150,000
Cash 150,000
To recognise the costs of running an aircraft in 20X1
Depreciation expense 100,000

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Advanced Financial Accounting II Admas University
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Accumulated depreciation - aircraft 100,000
To recognize depreciation of an ownership-interest in a jointly controlled aircraft in 20X1
3. JOINTLY CONTROLLED ENTITIES
 is a corporation, partnership, or other entity in which two or more venturers have an interest,
under a contractual arrangement that establishes joint control over the entity
 It involves the establishment of a corporation, partnership or other entity in which each
venture has an interest. The entity operates in the same way as any other entity, except that a
contractual arrangement between the ventures establishes joint control over the economic
activity of the entity.
 A jointly controlled entity controls the assets of the joint venture, incurs liabilities and
expenses and earns income. It may enter into contracts in its own name and raise finance for
the purposes of the joint venture activity.
 Each venturer usually contributes cash or other resources to the jointly controlled entity.
ACCOUNTING FOR INVESTMENTS IN JOINTLY CONTROLLED ENTITIES
A venturer shall account for all of its interests in jointly controlled entities using one of the following:
(a) THE COST MODEL
 a venturer shall measure its investments in jointly controlled entities for which there is no
published price quotation use the cost model
 Under this method investment income consists only of dividends received.
 The investment in a joint venture is measured at cost (including transaction costs) less any
accumulated impairment losses.
Example On Jan 1, 2021 entities A and B each acquired 30 % of the ordinary shares of entity Z for
Br 300,000. For the year ended Dec 31, 2021 entity Z recognized a profit of Br 400,000. On Dec 30,
2021 entity Z paid a dividend of Br 150, 000 for the year 2021. At Dec 31, 2021 the fair value of
each venturers’ investment in entity Z is Br 425,000. However, there is no published price quotation
for entity Z. In this case there would not be any impairment loss because the fair value exceeds its
carrying amount.
Required:
a) Record recognition of investment and earnings in joint venture
Solution:
Dividend = 150000 x 0.30 = Br 45000

Record recognition of investment and earnings in joint venture

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Advanced Financial Accounting II Admas University
Lecture Note 2023
Entity A Entity B
Jan 1,2021 Investment in Z 300000 Jan 1,2021 Investment in Z 300000
Cash 300000 Cash 300000
Dec 31,2021 No entry Dec 31,2021 No entry
Dec 30 ,2021 Investment in Z 45000 Dec 30 ,2021 Investment in Z 45000
Dividend income 45000 Dividend income 45000
Applying the cost model, Entity A & B must recognise dividend income of Br45, 000 in profit or loss
statement and Each venturer reports their investment in entity Z Br 300000.
(b) THE EQUITY METHOD
If significant influence is present, an investor should account for its investment in an joint venture
using the equity method
 Investment income consists of the investor’s proportionate share of the investee’s net income
In essence, the equity method mandates that the initial investment be recorded at cost, after which
the investment is adjusted for the actual performance of the joint venture. The following
calculation illustrates how the equity method operates:

+ Initial investment recorded at cost

+/- Investor's share of joint venture profit or loss
- Distributions received from the joint venture
= Ending investment in joint venture
Example
On 1 April 2017, Company A purchases 25% of the shares in Company B for $44,000. Company A
has significant influence over Company B and therefore accounts for its investment in Company B
using the equity method, by recognizing the investment at cost:
Investment in Company B 44,000
Cash 44,000.
At the end of the financial year (31 March 2018), Company B has made a surplus of $28,000.
Company A recognises its share of that surplus (25% x $28,000 = $7,000):
Investment in Company B 7,000
Share of surplus of equity accounted investee 7,000.

On 31 March 2018, Company B declares a dividend of $5,000. Company A recognises its share of
the dividend (25% x $5,000 = $1,250):
Cash 1,250
Investment in Company B 1,250.
At 31 March 2018, the carrying value of the investment in Company B is $49,750 ($44,000 + $7,000
- $1,250).

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Advanced Financial Accounting II Admas University
Lecture Note 2023
At the end of the next financial year (31 March 2019), Company B has made a deficit of $20,000.
Company A recognises its share of that deficit (25% x $20,000 = $5,000):
Share of loss of equity accounted investee (recognised in surplus or deficit) $5,000.
Investment in Company B (associate) $5,000.
At 31 March 2019, the carrying value of the investment in Company B is $44,750 ($49,750 at 31
March 2018 - $5,000).

(c) THE FAIR VALUE MODEL

The investment in a jointly controlled entity is initially recognised at the transaction price (excluding
transaction costs). After initial recognition, at each reporting date, the investment in the jointly
controlled entity is measured at fair value. Changes in fair value are recognised in profit or loss.
However, an investor using the fair value model is required to use the cost model for any investment
in a jointly controlled entity for which it is impracticable to measure fair value reliably without undue
cost or effort.
When an investment in a jointly controlled entity is recognised initially, a venturer shall measure it at
transaction price. Transaction price excludes transaction costs
Example: On Jan 1, 2021 entities A and B each acquired 30 % of the ordinary shares of entity Z for
Br 300,000. At Dec 31, 2021 entity Z recognised a profit of Br 400,000. On Dec 30, 2021 entity Z
paid a dividend of Br 150, 000 for the year 2021. At Dec 31, 2021 the fair value of each venturers’
investment in entity Z is Br 425,000. However, there is a published price quotation for entity Z.
Required:
a) Record recognition of investment and earnings in joint venture
Solution:
Record recognition of investment and earnings in joint venture
Entity A Entity B
Jan 1,2021 Investment in Z 300000 Jan 1,2021 Investment in Z 300000
Cash 300000 Cash 300000
Dec 31 ,2021 Investment in Z 125000 Dec 31 ,2021 Investment in Z 125000
Fair value gain 125000 Fair value gain 125000
Dec 31 ,2021 Cash 45000 Dec 31 ,2021 Cash Z 45000
Dividend income 45000 Dividend income 45000
Applying the fair value model, in determining profit or loss for the year ended 31 December 2021
Entity A & B must:
Recognize dividend income of Br 45,000 (30% x 150000)
Recognize the increase in fair value of 125,000 (Br 425,000 – 300000)

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Advanced Financial Accounting II Admas University
Lecture Note 2023
At Dec 31, 2021 Entity A & B must report their investment in Entity Z at its fair value of Br
425,000.
1.5 Accounting for Investments in Joint Ventures businesses
At present, International Accounting Standards (IAS) permits the use of two alternative accounting
methods- the proportionate consolidation method or the equity method – for a venture’s investment
in a jointly controlled entity, which might be a corporation or a partnership. Under the equity method,
the ventures maintain an investment account on their books for their share of the venture capital. The
investment in the joint venture account is debited for the initial investment and for the investor’s
share of subsequent profits. Withdrawals and shares of losses are credited to the investment account.
The balance in the investment account should correspond to the balance in the venture’s capital
account shown on the joint venture statements.
Example:
The two methods may be illustrated by assuming that ‘A’ Company and 'B’ Company each invested
Br. 320,000 for a 50% interest in AB joint venture on January 1, 2002. The two parties share profits
and losses equally. The condensed financial statements for the joint venture, AB Company, for 2002
were as follows:
XY Company
Income Statement
For the Year Ended December 31, 2006
Revenue 1,600,000
Less: Costs and expense ( 1,200,000)
Net Income 400,000

XY Company
Statement of Joint venturers’(operator) Capital
For the Year Ended December 31, 2006

Company A Company B Combined

Investment on January 1 Br320000 Br320000 Br640000
Add: Net Income 200,000 200,000 400,000
Joint venturers’(operator) capital, Dec31, Br520,000 Br520,000 Br1,040,000
XY Company
Balance Sheet
December 31, 2006

Assets
Current Assets Br1,280,000

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Advanced Financial Accounting II Admas University
Lecture Note 2023
Other Assets 1,920,000
Total Assets Br3,200,000
Liabilities & Venturers’ Capital
Current Liabilities Br640,000
Long-Term Liabilities 1,520,000
Total Liabilities Br2,160,000
Venturers’(oporators) Capital:
Company A Br520,000
Company B 520,000 Br1,040,000
Total Liabilities & Venturers’ Capital Br3,200,000

Thus, based on the foregoing information the necessary accounting entries using the two
alternative methods would be as follows:
a. Each venturer’s journal entries under the equity method of accounting
i. Recognition of investments in a joint venture
Jan. 1 Investment in AB Company 320,000
Cash 320,000
ii. Recognition of proportionate share in earnings of a joint venture
Dec. 31 Investment in AB Company 200,000
Investment Income 200,000
b. In addition to the entries under the equity method, the following consolidation entry is required
for each venturer in case of the proportionate consolidation method.
2002
Dec. 31 Current assets (1,280,000 X 0.5) 640,000
Other assets (1,920,000 X 0.5) 960,000
Costs and expenses (1,200,000 X 0.5) 600,000
Investment income (400,000 X 0.5) 200,000
Current liabilities (640,000 X 0.5) 320,000
Long-term liabilities (1,520,000 X 0.5) 760,000
Revenue (1,600,000 X 0.5) 800,000
Investment in AB Company (1,040,000 X 0.5) 520,000
EXERCISE
The following transactions were occurred in the years 2002 and 2003:
Jan. 5, 2002, CABU Company acquired 24, 000 shares (20% of BATU Company common stock) at a
cost of Br. 10 a share.
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Advanced Financial Accounting II Admas University
Lecture Note 2023
Dec. 31, 2002, BATU Company reported net income of Br. 100, 000
Jan. 20, 2003, BATU Company announced and paid a cash dividend of Br. 60, 000
Dec. 31, 2003, BATU Company reported a net loss of Br. 30, 000.
Required:
Present the Journal entries required to account for the investment in the books of CABU Company,
using
a. Cost method of accounting
b. Equity method or accounting

Solution
a) Cost method b) Equity method
(1) Jan. 5, 2002
Investment in BATU (24,000*10) 240,000 Investment in BATU (24,000*10) 240,000
Cash 240, 000 Cash 240, 000
(2) Dec. 31, 2002
No entry Investment in BATU (20% x Br. 100, 000) 20, 000
Investment income 20, 000
(3) Jan. 20, 2003
Cash (20% x Br. 60, 000) 12, 000 Cash 12, 000
Investment income 12, 000 Invst in BATU in Co c/s 12, 000
(4) Dec. 31, 2003
No entry Loss on investment (20% x 30, 000) 6, 000
Inve’st in BATU c/s 6, 000
.
CHAPTER 2
NATURE OF PUBLIC ENTERPRISES
Public enterprises are defined as wholly State owned enterprises established to carry on for gain
manufacturing, distribution, service rendering or other economic and related activities. These are
companies that are "formed to carry out some special public undertakings, for example, railways,
waterworks, gas, electricity generation, etc.
There are several reasons for their establishment that include:
 National security for areas such as defense industries and public transport;
 Revenue raising in particular in events such as where tax collection is difficult or impossible;

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Lecture Note 2023
 Economic control and self-reliance;
 Lack of private investment in undertakings where large-scale investment is required;
 Equity considerations when private companies fail to function profitably; and
 The fear of private monopoly situations.
The major characteristics of public enterprises include:
 Public ownership,
 Public control and establishment by a separate law,
 Having distinct legal personality,
 Limited degree of autonomy and public finance
Some examples of public enterprises in Ethiopia include:
 Bole Printing Enterprise,
 Ambo Mineral Water Factory,
 National Alcohol & Liquor Factory,
 BerhanenaSelam Printing Enterprise,
 Mugher Cement Factory,etc
Benefits of Public Enterprises
The operation of public enterprises in an economy is highly beneficial to the economy. The
contribution of public enterprises can be viewed from two perspectives: economic benefit and social
benefit.
A. Economic Benefits
From economic point of view, public enterprises produce important impacts that strengthen the
economy by providing the following economic benefits. They generate revenue for the government
through various means. Dividend, interest on loans, excise duty, sales taxes, corporate taxes etc are
paid to the government by public enterprises.
 Public enterprises also exploit the natural and technological resources of the state. This maximizes
the social welfare and developmental opportunities in the economy.
 Public enterprises save scarce foreign exchange either by exporting the foreign currency
generating goods and services of the country by substituting imported products.
 Public enterprises help in reducing regional disparities through fair dispersal of industries.
 Public enterprises provide infrastructural facilities for the development of the economy and the
private sector.
B. Social Benefits
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Advanced Financial Accounting II Admas University
Lecture Note 2023
On the social area, public enterprises are considered as a welfare promoting organizations. The
social benefits of public enterprises can be summarized as follows.
Characteristics of Public Enterprise
 Statutory body: A public enterprise is an expression of the wish of the state to create a new
separate agency with specific objective.
 Insulated personality: For the reason that it possesses legal personality, a public enterprise not
only is separate from persons who conduct its affairs but also from the state.
 Independent governing body: Usually an independent board administers the affairs of public
enterprises. But there has been a division of opinion as to what should be the composition of the
members of this board; whether they should be specialists or representatives of any section, class or
group interest.
 Respectful relationship with minister: A public enterprise is answerable to the government that
establishes it through the appropriate minister. The power given to ministries may vary according to
the acts, but the power the minister exercises has important implication on the enterprise’s
operations, and the level and extent of these controls is not easily determinable.
 Autonomous working conditions: As far as the public enterprise is a “child of the state”, it is
subject to supervision and control. However, over centralization is the characteristic of public
undertaking that can cause managerial inefficiency in the enterprises. Thus, it is reasonable to say
that public enterprises must ensure their autonomy of normal (day to day) operations-affording
freedom from government red tape, treasury control, and political dictation.
 Self-contained finance: This is a consequence of the above point, as the autonomy concept will
remain not real unless accompanied by financial independence. To realize the expected outcome,
the public enterprises must rely on assured economic resources they can command at once rather
than on the annual “generosity of the legislature”.
 Purposes other than profit: The public enterprise has a public purpose and other objectives than
profit only. It is, as a result, not interested in maximizing profits, but should run efficiently and in
the process make profits or surpluses that are essential especially for the growth of the economy.
 No share and shareholders: The public enterprise has no share or shareholders and the “profit
motive” is to be replaced by “public service motive”, but in financial terms the nation or the state
owns the equity of the public enterprise.
 Public monopoly: It is customary for the state to declare monopolistic rights for itself in any
particular area of business activity. Public enterprise may then have monopolistic rights in that
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Lecture Note 2023
particular line of business activity, as it would be uneconomical and wasteful to permit competing
units in parallel lines of public undertakings.
 Commercial audit: The public enterprise is formed in order to operate free from constraints of
tedious rules and procedures applicable to government departments and ministries. It must prepare
its accounts according to well-settled commercial principles, including payment of interest on
capital outlays, taxes on profit, and adequate rate of return on investment.
Recently six essential elements characterizing the public dimension and enterprise dimension of the
public enterprise have been identified.
(1) The public dimension includes:
 Public purpose,
 Public ownership, and
 Public control.
(2) The enterprise dimension recognizes:
 a field of activity of business character,
 investment and return, and
 marketing of output in the public enterprise
Accounting for Public Enterprises
Providing adequate accounting system for the public enterprise, first and foremost, depends on the
relationship and organization structure of the State Corporation, state enterprise, and supervising
authority, that is, whether accounting is centralized at the corporation or at the enterprise level
paralleling the extent of centralization or decentralization of authority and responsibility of the organs
related to it.
2.10 Formation of a Public Enterprise
Dear learner, the following example describes the accounting for the formation of a public enterprise.
Example: The government formed XYZ Enterprise with Authorized Capital of Br 50,000,000 in
accordance with the requirements of Proc. No. 25/1992 with investment of the following assets:
Cash Br 15,000,000
Equipment (fair value) 700,000
The journal entry for the formation of the XYZ Enterprise would be as follows:
Cash 15,000,000
Equipment (fair value) 700,000
State Capital 15,700,000
2.10 Operation of a Public Enterprise

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Advanced Financial Accounting II Admas University
Lecture Note 2023
Look at the accounting for the operation of a public enterprise assume the following information for
XYZ Enterprise:
XYZ Enterprise
Trial Balance
Dec. 31, 2006 (Br ‘000)
Cash Br 10,050
Accounts Receivable 2,600
Property, Plant and Equipment 2,200
Accumulated Depreciation Br 50
Accounts Payable 150
Notes Payable 200
State Capital 15,700
Sales 5,000
Operating Expenses 2,950
Purchases 3,300 ____
21,100 21,100
In addition to the above trial balance assume that the ending inventory is Br 1,600,000; the board of
directors decided to establish other reserves of Br 100,000 from the net income of the year and profit
tax rate is 35%.On the basis of the foregoing information we can prepare the income statement for
XYZ enterprise for the year ended Dec. 31, 2006, the balance sheet on Dec. 31, 2006, and journal
entries to close the income summary account as follows:
a. Income statement for the year ended Dec. 31, 2006
XYZ Enterprise
Income Statement
For the Year ended Dec. 31, 2006(‘000 birr)
Sales Br 5,000
Cost of Goods Sold 1,700
Gross profit 3,300
Operating Expenses 2,950
Income before tax 350
Income tax expense (35%) 122.5
Net Income 227.5
b. The journal entries for transfer of net income to legal reserve and other reserves, and to recognize
the state dividend payable would be as follows:
2006 Income summary 227,500

Prepared by Lemessa N Page 16

Advanced Financial Accounting II Admas University
Lecture Note 2023
Dec. 31 Legal Reserve (5% x 227,500) 11,375
Retained Earnings 100,000
State Dividend Payable 116,125
Dec. 31 Income tax expense 122,500
Income tax payable 122,500

c. Balance sheet at Dec. 31, 2006.

XYZ Enterprise
Balance Sheet
Dec. 31, 2006(‘000 birr)
Assets Liabilities and Capital
Cash 10,050 Accounts Payable 150
Accounts Receivable 2,600 Income tax payable 122.5
Inventory 1,600 Notes Payable 200
Property, Plant & Equipment 2,200 State Dividend Payable 116.1
Less: Acc. Depreciation (50) 2150 State Capital 15,700
Legal Reserve 11.4
Other Reserves 100
Total assets 16,400 Total Liabilities and Capital 16,400

Prepared by Lemessa N Page 17