ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 45  May 2023 CPA Licensure Examination

AFAR-14
ADVANCED FINANCIAL ACCOUNTING & REPORTING (AFAR) A. DAYAG  A. CRUZ

SMALL & MEDIUM ENTITIES (SMEs) – INVESTMENT IN JOINT VENTURES

PFRS 11 Joint Arrangements PFRS for SMEs Sec. 15 – Investment in Joint Ventures
Joint Operations - line by line accounting of • Jointly Controlled Operations (JCO)* – the
the underlying assets, liabilities, revenue and venturer should recognize assets that it controls
expenses and liabilities it incurs as well as its share of income
earned and expenses that are incurred
Joint Operations – line by line accounting of ❖ Jointly Controlled Assets (JCA)* - the venturer
the underlying assets and liabilities, revenue should recognize its share of the assets and
and expenses liabilities it incurs as well as income it earns and
expenses that are incurred
Joint Venture ✓ Joint Controlled Entities (JCE)
- Equity Method Methods: (option for the venturer to use) -
1. Cost Model** (except if there is a published
quotation – then must use FVTPL (fair value
through profit or loss)
2. Equity Method**
3. Fair value model (FVTPL)
** Cost less impairment losses and amortization
(life should be presumed to be 10 years)

• The accounting for the joint venture should therefore reflect the economic substance of this
arrangement by recognizing the assets that the venturer controls.

The venturer’s own property, plant and equipment that it uses to carry out activities of the jointly
controlled operation, any liabilities that it retains obligation for and the expenses that it incurs should
be recognized by the entity.

Each venturer should also recognize its share of income generated by the jointly controlled operations.

❖ A venturer should recognize its share of the jointly controlled assets, any liabilities that the entity has an
obligation to meet and a share of the liabilities that are jointly incurred. Jointly incurred expenses and
a share of the relevant income and expenses that are earned or incurred jointly should also be
recognized by each venture

* Under PAS 31 (PAS 31 superseded by PFRS 11 & 12) but still applicable for SME (for JCO and JCA same
procedures with Joint Operations under PFRS 11.)

✓ PFRS for SMEs for Jointly Controlled Entity (JCE)

Cost Model Equity Method Fair Value Model (FVTPL)
No published price An investor which has elected the
quotation. cost model accounts for its
investments for which there is a
published quotation using Fair
Value model
Transaction price including Transaction price including Transaction price excluding
transaction costs transaction costs transaction costs
Dividend income Share of profit or loss Dividend income
Cost less impairment Cost less impairment No impairment. Changes in fair
value to profit or loss.

SME – Overview Problem

On January 1, 20x8 SME A and SME B, each acquired 25 per cent of the equity of entities X, Y and Z for
P10,000, P15,000 and P28,000 respectively. SME A and SME B have joint control over the strategic financial
and operating decisions of entities X, Y and Z. Transaction costs of 1 per cent of the purchase price of the
shares were incurred by SME A and SME B.

On January 2, 20x8 entity X declared and paid dividends of P1,000 for the year ended 20x7. On December
31, 20x8 entity Y declared a dividend of P8,000 for the year ended 20x8. The dividend declared by entity Y
was paid in 20x9.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
SMEs – INVESTMENT in JOINT VENTURES
AFAR-14
For the year ended December 31, 20x8, entities X and Y recognized profit of respectively P5,000 and
P18,000. However, entity Z recognized a loss of P20,000 for that year. Published price quotations do not
exist for the shares of entities X, Y and Z. Using appropriate valuation techniques the venturers (i.e., SME A
and SME B) determined the fair value of each of their investments in entities X, Y and Z at December 31,
20x8 as P13,000, P29,000 and P15,000 respectively. Costs to sell are estimated at 5 per cent of the fair value
of the investments.

Neither SME A nor SME B prepares consolidated financial statements because they do not have any
subsidiaries.

SME A measures its investments in jointly controlled entities using the cost model and SME B measures its
investments in jointly controlled entities using the fair value model

1. In the accounting records of SME A (cost model), the journal entry on January 1, 20x8 to recognize the
acquisition of investments in jointly controlled entities should be:
a. Investment in jointly controlled entity (entity X)………. 10,000
Investment in jointly controlled entity (entity Y)………. 15,000
Investment in jointly controlled entity (entity Z)……….. 28,000
Cash………………………………………………………. 53,000
b. Investment in jointly controlled entity (entity X)………. 10,000
Investment in jointly controlled entity (entity Y)………. 15,000
Cash………………………………………………………. 25,000
c. Investment in jointly controlled entity (entity X)………. 10,000
Investment in jointly controlled entity (entity Z)……….. 28,000
Cash………………………………………………………. 43,000
d. Investment in jointly controlled operations (entity X)… 10,000
Investment in jointly controlled operations (entity Y)… 15,000
Investment in jointly controlled operations (entity Z)…. 28,000
Cash……………………………………………………….. 53,000

2. In the accounting records of SME B (fair value model), the journal entry on January 1, 20x8 to recognize
the acquisition of investments in jointly controlled entities should be:
a. Investment in jointly controlled entity (entity X)………. 10,000
Investment in jointly controlled entity (entity Y)………. 15,000
Investment in jointly controlled entity (entity Z)……….. 28,000
Cash………………………………………………………. 53,000
b. Investment in jointly controlled entity (entity X)………. 10,000
Investment in jointly controlled entity (entity Y)………. 15,000
Cash………………………………………………………. 25,000
c. Investment in jointly controlled entity (entity X)………. 10,000
Investment in jointly controlled entity (entity Z)……….. 28,000
Cash………………………………………………………. 43,000
d. Investment in jointly controlled operations (entity X)… 10,000
Investment in jointly controlled operations (entity Y)… 15,000
Investment in jointly controlled operations (entity Z)…. 28,000
Cash……………………………………………………….. 53,000

3. In the accounting records of SME A (equity method), the journal entry on January 1, 20x8 to recognize
the acquisition of investments in jointly controlled entities should be:
a. Investment in jointly controlled entity (entity X)………. 10,000
Investment in jointly controlled entity (entity Y)………. 15,000
Investment in jointly controlled entity (entity Z)……….. 28,000
Cash………………………………………………………. 53,000
b. Investment in jointly controlled entity (entity X)………. 10,000
Investment in jointly controlled entity (entity Y)………. 15,000
Cash………………………………………………………. 25,000
c. Investment in jointly controlled entity (entity X)………. 10,000
Investment in jointly controlled entity (entity Z)……….. 28,000
Cash………………………………………………………. 43,000
d. Investment in jointly controlled operations (entity X)… 10,000
Investment in jointly controlled operations (entity Y)… 15,000
Investment in jointly controlled operations (entity Z)…. 28,000
Cash……………………………………………………….. 53,000

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
SMEs – INVESTMENT in JOINT VENTURES
AFAR-14

4. In the accounting records of SME A (cost model), the journal entry on January 1, 20x8 to recognize the
transaction costs incurred to acquire the investments in jointly controlled entities should be:
a. Investment in jointly controlled entity (entity X)………. 100
Investment in jointly controlled entity (entity Y)………. 150
Investment in jointly controlled entity (entity Z)……….. 280
Cash………………………………………………………. 530
b. Investment in jointly controlled entity (entity X)………. 100
Investment in jointly controlled entity (entity Y)………. 150
Cash………………………………………………………. 250
c. Profit and loss………………………………………………… 530
Cash………………………………………………………. 530
d. Investment in jointly controlled operations (entity X)… 100
Investment in jointly controlled operations (entity Y)… 150
Investment in jointly controlled operations (entity Z)…. 280
Cash……………………………………………………….. 530

5. In the accounting records of SME B (fair value model), the journal entry on January 1, 20x8 to recognize
the transaction costs incurred to acquire the investments in jointly controlled entities should be:
a. Investment in jointly controlled entity (entity X)………. 100
Investment in jointly controlled entity (entity Y)………. 150
Investment in jointly controlled entity (entity Z)……….. 280
Cash………………………………………………………. 530
b. Investment in jointly controlled entity (entity X)………. 100
Investment in jointly controlled entity (entity Y)………. 150
Cash………………………………………………………. 250
c. Profit and loss………………………………………………… 530
Cash………………………………………………………. 530
d. Investment in jointly controlled operations (entity X)… 100
Investment in jointly controlled operations (entity Y)… 150
Investment in jointly controlled operations (entity Z)…. 280
Cash……………………………………………………….. 530

6. In the accounting records of SME A (equity method), the journal entry on January 1, 20x8 to recognize
the transaction costs incurred to acquire the investments in jointly controlled entities should be:
a. Investment in jointly controlled entity (entity X)………. 100
Investment in jointly controlled entity (entity Y)………. 150
Investment in jointly controlled entity (entity Z)……….. 280
Cash………………………………………………………. 530
b. Investment in jointly controlled entity (entity X)………. 100
Investment in jointly controlled entity (entity Y)………. 150
Cash………………………………………………………. 250
c. Profit and loss………………………………………………… 530
Cash………………………………………………………. 530
d. Investment in jointly controlled operations (entity X)… 100
Investment in jointly controlled operations (entity Y)… 150
Investment in jointly controlled operations (entity Z)…. 280
Cash……………………………………………………….. 530

7. In the accounting records of SME A (cost model), the journal entry on January 2, 20x8 to recognize
dividends received from entity X should be:
a. Cash…………………………………………………………… 250
Profit or loss (other income, dividend received)... 250
b. Dividend receivable…..…………………………………… 250
Profit or loss (other income, dividend received)... 250
c. Cash…………………………………………………………… 250
Investment in jointly controlled entity (entity X)...... 250
d. Dividend receivable…..…………………………………… 250
Investment in jointly controlled entity (entity X)...... 250

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
SMEs – INVESTMENT in JOINT VENTURES
AFAR-14
8. In the accounting records of SME B (fair value model), the journal entry on January 2, 20x8 to recognize
dividends received from entity X should be:
a. Cash…………………………………………………………… 250
Profit or loss (other income—dividend from jointly
controlled entity)…………………………………….. 250
b. Dividend receivable…..…………………………………… 250
Profit or loss (other income—dividend from jointly
controlled entity)…………………………………….. 250
c. Cash…………………………………………………………….. 250
Investment in jointly controlled entity (entity X)...... 250
d. Dividend receivable…..…………………………………… 250
Investment in jointly controlled entity (entity X)...... 250

9. In the accounting records of SME A (equity method), the journal entry on January 2, 20x8 to recognize
dividends received from entity X should be:
a. Cash…………………………………………………………… 250
Profit or loss (other income—dividend from jointly
controlled entity)…………………………………….. 250
b. Dividend receivable…..…………………………………… 250
Profit or loss (other income—dividend from jointly
controlled entity)…………………………………….. 250
c. Cash…………………………………………………………… 250
Investment in jointly controlled entity (entity X)...... 250
d. Dividend receivable…..…………………………………… 250
Investment in jointly controlled entity (entity X)...... 250

10. In the accounting records of SME A (cost model), the journal entry on December 31, 20x8 to recognize
the dividend receivable from entity Y:
a. Receivable (entity Y)…………..…………………………… 2,000
Profit or loss (other income, dividend received)... 2,000
b. Cash……………………...…………………………………… 2,000
Profit or loss (other income, dividend received)... 2,000
c. Receivable (entity Y)…………..…………………………… 2,000
Investment in jointly controlled entity (entity Y)...... 2,000
d. Cash……………………….…………………………………… 2,000
Investment in jointly controlled entity (entity Y)...... 2,000

11. In the accounting records of SME B (fair value model), the journal entry on December 31, 20x8 to
recognize the dividend receivable from entity Y:
a. Receivable (entity Y)…………..…………………………… 2,000
Profit or loss (other income—dividend from jointly
controlled entity)…………………………………….. 2,000
b. Cash……………………...…………………………………… 2,000
Profit or loss (other income, dividend received)... 2,000
c. Receivable (entity Y)…………..…………………………… 2,000
Investment in jointly controlled entity (entity Y)...... 2,000
d. Cash……………………….…………………………………… 2,000
Investment in jointly controlled entity (entity Y)...... 2,000

12. In the accounting records of SME A (equity method), the journal entry on December 31, 20x8 to
recognize the dividend receivable from entity Y:
a. Receivable (entity Y)…………..…………………………… 2,000
Profit or loss (other income—dividend from jointly
controlled entity)…………………………………….. 2,000
b. Cash……………………...…………………………………… 2,000
Profit or loss (other income, dividend received)... 2,000
c. Receivable (entity Y)…………..…………………………… 2,000
Investment in jointly controlled entity (entity Y)...... 2,000
d. Cash……………………….…………………………………… 2,000
Investment in jointly controlled entity (entity Y)...... 2,000

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
SMEs – INVESTMENT in JOINT VENTURES
AFAR-14

13. In the accounting records of SME A (equity method), the journal entry on December 31, 20x8 to
recognize the share of entity X’s (a jointly controlled entity) profit for the year Y:
a. Investment in jointly controlled entity (entity X)………. 1,250
Profit or loss (share of jointly controlled
entity’s earnings)…………………………………….. 1,250
b. Profit or loss (share of jointly controlled
entity’s earnings)……………………………………………… 1,250
Investment in jointly controlled entity (entity X)….. 1,250
c. Cash……………………...……………………………………... 1,250
Profit or loss (share of jointly controlled
entity’s earnings)…………………………………….. 1,250
d. Receivable (entity X)…………..…………………………… 2,000
Investment in jointly controlled entity (entity X)...... 2,000

14. In the accounting records of SME A (equity method), the journal entry on December 31, 20x8 to
recognize the share of entity Y’s (a jointly controlled entity) profit for the year Y:
a. Investment in jointly controlled entity (entity Y)………. 4,500
Profit or loss (share of jointly controlled
entity’s earnings)…………………………………….. 4,500
b. Profit or loss (share of jointly controlled
entity’s earnings)……………………………………………… 4,500
Investment in jointly controlled entity (entity Y)….. 4,500
c. Cash……………………...…………………………………….. 4,500
Profit or loss (share of jointly controlled
entity’s earnings)……………………………………… 4,500
d. Receivable (entity Y)…………..…………………………… 2,000
Investment in jointly controlled entity (entity Y)...... 2,000

15. In the accounting records of SME A (equity method), the journal entry on December 31, 20x8 to
recognize the share of entity Z’s (a jointly controlled entity) loss for the year Y:
a. Investment in jointly controlled entity (entity Z)………. 5,000
Profit or loss (share of jointly controlled
entity’s earnings)…………………………………….. 5,000
b. Profit or loss (share of jointly controlled
entity’s earnings)……………………………………………… 5,000
Investment in jointly controlled entity (entity Z)….. 5,000
c. Cash……………………...……………………………………... 5,000
Profit or loss (share of jointly controlled
entity’s earnings)…………………………………….. 5,000
d. Receivable (entity Z)…………..…………………………… 5,000
Investment in jointly controlled entity (entity Z)...... 5,000

16. In the accounting records of SME A (cost model), the journal entry on December 31, 20x8 to recognize
the impairment of the investment in entity Z.
a. Profit or loss (impairment loss)……………………………. 9,030
Investment in jointly controlled entity (entity Z)….. 9,030
b. Profit or loss (impairment loss)……………………………. 13,000
Investment in jointly controlled entity (entity Z)….. 13,000
c. Profit or loss (impairment loss)……………………………. 14,030
Investment in jointly controlled entity (entity Z)….. 14,030
d. No entry required.

17. In the accounting records of SME B (fair value model), the journal entry on December 31, 20x8 to
recognize the impairment of the investment in entity Z.
a. Profit or loss (impairment loss)……………………………. 9,030
Investment in jointly controlled entity (entity Z)….. 9,030
b. Profit or loss (impairment loss)……………………………. 13,000
Investment in jointly controlled entity (entity Z)….. 13,000
c. Profit or loss (impairment loss)……………………………. 14,030
Investment in jointly controlled entity (entity Z)….. 14,030
d. No entry required.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
SMEs – INVESTMENT in JOINT VENTURES
AFAR-14

18. In the accounting records of SME A using equity method, the journal entry on December 31, 20x8 to
recognize the impairment of the investment in entity Z.
a. Profit or loss (impairment loss)……………………………. 9,030
Investment in jointly controlled entity (entity Z)….. 9,030
b. Profit or loss (impairment loss)……………………………. 13,000
Investment in jointly controlled entity (entity Z)….. 13,000
c. Profit or loss (impairment loss)……………………………. 14,030
Investment in jointly controlled entity (entity Z)….. 14,030
d. No entry required.
19. In the accounting records of SME B (fair value model), the journal entry on December 31, 20x8 to
recognize the decrease in fair value of investment in entity Z, a jointly controlled entity, in the year.
a. Profit or loss (change in fair value)……………………… 9,030
Investment in jointly controlled entity (entity Z)….. 9,030
b. Profit or loss (change in fair value)...……………………. 13,000
Investment in jointly controlled entity (entity Z)….. 13,000
c. Profit or loss (change in fair value)……………………... 14,030
Investment in jointly controlled entity (entity Z)….. 14,030
d. No entry required.

20. In the accounting records of SME B (fair value model), the journal entry on December 31, 20x8 to
recognize the increase in fair value of investments in jointly controlled entities (entities X and Y), in the
year.
a. Investment in jointly controlled entity (entity X)……….. 3,000
Investment in jointly controlled entity (entity Y)……….. 14,000
Profit or loss (change in fair value)…………………. 17,000
b. Investment in jointly controlled entity (entity X)……….. 3,000
Profit or loss (change in fair value)…………………. 3,000
c. Investment in jointly controlled entity (entity Y)……….. 14,000
Profit or loss (change in fair value)…………………. 14,000
d. No entry required.

-end-

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**The great thing in the world is not so much where you are
but in what direction you are going**
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and the things you can’t control. Fix the first, forget the second.**
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where you need it.**
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