CPA REVIEW SCHOOL OF THE PHILIPPINES MANILA

PRACTICAL ACCOUNTING PROBLEMS II JOINT ARRANGEMENT

GUERRERO / GERMAN / LIM / FERRER / LACO / VALIX

1. Two real estate companies, RK Developers and SV Holdings set up a separate vehicle (entity DP)
for the purpose of acquiring and operating a shopping centre. The contractual arrangement
between the parties establishes joint control of the activities that are conducted by entity DP.

The main feature of entity DP’s legal form is that the entity, not the parties, has rights to the assets
and obligations for the liabilities relating to the arrangement.

These activities include the rental of the retail units, managing the car park, maintaining the
centre and its equipment, such as lifts, and building the reputation and customer base for the
centre as a whole.

The terms of the contractual arrangements are such that:

 Entity DP owns the shopping centre. The contractual arrangement does not specify that the
parties have rights to the shopping centre.
 The parties are not liable in respect of the liabilities of entity DP. If entity DP is unable to pay
any of its liabilities, the liability of each to any third party will be limited to the parties’ unpaid
contribution.
 The parties have the right to sell or pledge their interests in entity DP
 Each party receives a share of the income from the shopping centre (rental income net of
operating costs) in accordance with its interests in entity DP.

Transactions of the contractual arrangement for 2016 and 2017 follow:

2016
 RK and SV contributed 60 million each for a ½ interest in the net assets of Entity DP.
 Organization expenses incurred amounted to P 600,000.
 Entity DP acquired land at a cost of P12 million.
 Constructed a building (shopping centre) at a cost of P90 million.
 Operating expenses for the year amounted to P6 million.
 Rental income collected from the tenants, P60 million.
 Net income or loss is distributed to the venturers in accordance with their interest.

2017
 Operating expenses (including depreciation) incurred for the year , P21 million
 Rental income collected for the year, P72 million
 Each venture received a share of the income or loss from rental income net of the operating
expenses.

1. What is the interest of RK Developers in the joint venture on December 31, 2016?
 a. 84,000,000
b. 86,700,000
c. 90,000,000
d. 120,000,000
2. What is the net income (loss) of entity DP on December 31, 2017?
a. 51,000,000
b. 72,000,000
c. 93,000,000
d. 63,000,000
3. What is the interest of SV Holdings in the joint arrangement as of December 31, 2017?
a. 112,200,000
b. 87,000,000
c. 60,000,000
d. 4,000,000
2. Timon and Pumbaa establish joint arrangement HakunaMatata (HM) using a separate vehicle, but
the legal form of the separate vehicle does not confer separation between the parties and the
separate vehicle itself.

That is, Timon and Pumbaa have rights to the assets and obligations for the liabilities of HM (which
is a joint operation). Neither the contractual terms nor the other facts and circumstances indicate
otherwise.

Accordingly, Timon and Pumbaa account for their rights to assets and their obligations for
liabilities relating to HM in accordance with IFRS 11.

Timon and Pumbaa each own 50% of the outstanding shares of TM. However, the contractual
terms of the joint arrangement state that Timon has the rights to all of Airplane No. 1 and the
obligation to pay all the third party debt in HM.

Timon and Pumbaa have rights to all other assets in TM, and obligations for all other liabilities in
TM in proportion to their equity interests. (i.e. 50%)

TM’s statement of financial position is as follows:

Assets Liabilites and Equity

Cash 60,000,000 Debt 36,000,000
Airplane No. 1 360,000,000 Employee Benefit Plan Obligation 150,000,000
Airplane No. 2 300,000,000 Equity 210,000,000
Total Assets 720,000,000 Total liabilities and equity 720,000,000

1. Under IFRS 11, what is the amount of total assets of Timon as shown in its own statement
of financial position to account for its rights and obligations in TM?

a. 360,000,000
 b. 540,000,000
c. 660,000,000
d. 420,000,000

2. Under IFRS 11, what is the amount of total liabilities of Pumbaa as shown in its own
statement of financial position to account for its rights and obligations in TM?

a. 435,000,000
b. 150,000,000
c. 75,000,000
d. 255,000,000

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