1. ADVANCED FINANCIAL ACCOUNTING (ACFN3151)
Prepared By: Dejen M. (MSc Candidate)
Email: dejenn21@gmail.com
Addis Ababa, Ethiopia
February,2022
COLLAGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE
2. CHAPTER ONE
OVER VIEW OF ACCOUNTING FOR JOINT VENTURES and
partnership
A joint venture is a contractual
agreement whereby two or more
parties undertake an economic
activity which is subject to joint
control. Joint control represents a
contractually agreed sharing of
control over an economic activity.
3. A joint venture is usually a temporary
partnership without the use of a firm
name, limited to carrying out a particular
business plan in which the persons
concerned agree to contribute capital and
to share profits or losses. The parties in a
joint venture are known as co-venturers
and their liability is limited to the
adventure concerned for which they agree
to contribute capital and share profits or
losses.
4. Main features of the joint venture include
1. Two or more persons are needed.
2. It is an agreement to execute a particular
venture or a project.
3. The joint venture business may not have
a specific name.
4. It is of temporary nature.
5. The co-ventures share profit and loss in
an agreed ratio.
6. The profits and losses are to be shared
equally if not agreed otherwise.
5. 7. The co-ventures are free to continue
with their own business unless agreed
otherwise during the life of joint venture.
8. Accounting for joint venture did not
follow the accrual basis.
9. Net income not determined at regular
intervals.
10. Measurement and reporting of net
income or loss awaited completion of the
venture.
6. THREE BROAD TYPES of joint venture
activity:
1. jointly controlled operations
2. jointly controlled assets; and
3. jointly controlled entities
They all have the common
characteristics of having two or more
joint venturers bound under contract and
establishing joint control.
7. Jointly Controlled Operations
Some joint ventures involve the use of assets
and other resources rather than the
establishment of a corporation, partnership or
other entity. Each venture uses its own assets
and incurs its own expenses and raises its
own finance.
The joint venture agreement usually provides a
means by which revenue from the sale of the
joint product and any expenses are shared
among the venturers.
8. An example might be a joint venture to
manufacture market and distribute jointly a
particular product such as an aircraft. Different
parts of the manufacturing process are carried
out by each of the venturers and each venturer
takes a share of the revenue from the sale of the
aircraft but bears its own costs. A venturer
should recognize in its financial statements the
following: (a) The assets it controls and the
liabilities it incurs; and
(b) The expenses it incurs and its share of the
income it earns from the sale of goods or
services by the joint venture
9. Jointly Controlled Assets
Some joint ventures involve joint control
by the venturers over one or more assets
which are dedicated for the purposes of
the joint venture. Each venturer may
take a share of the output and bear an
agreed share of the expenses incurred.
No corporation, however, is established.
Many activities in oil and gas and mineral
extraction involve jointly controlled
assets e.g. an oil pipeline.
10. Another example is the joint control of property, each
taking a share of the rents received and bearing a share
of the expenses. A venturer should recognize in its
financial statements:
(a) Its share of jointly controlled assets,
classified according to their nature;
(b) Any liabilities it has incurred;
(c) Its share of any liabilities jointly incurred
with other venturers;
(d) Any income from the sale or use of the share
of the output of the joint venture together with
its share of any expenses incurred;
(e) Any expenses incurred are its interest in the
joint venture.
11. Jointly Controlled Entities
The main type of joint venture is a jointly controlled
entity. In this case a corporation is established and
operates as per other legal entities except that there
is a contractual arrangement between the venturers
that 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 contracts in its own
name and raise finance for itself and each venturer
is entitled to a share of the results of the jointly
controlled entity.
12. Possible methods of accounting for
investment in joint venture entities
Full Consolidation method;
Equity method;
Proportionate consolidation
method
Expanded equity method
Cost method
13. Full Consolidation method
The full consolidation method which
ordinarily referred to us consolidation is
appropriate under the circumstances where
the investor controls the investee. The
investee is a legal entity in which the
investment has been made. In this case the
investor holds the majority controlling
interest and it has the ability to control
unilaterally the financial and operating
policies of the investee.
14. The full consolidation method meets the
requirements of generally accepted
accounting principles when one of the
investors is in control.
Advantage : it reflects the full scope of
operations and financial position
Disadvantage : it shows assets and
operations that are not under the direct
control of the investors as if they were.
15. Equity Method
The equity method is used when the investor has
the ability to exercise “significant influence” over
the investee.
The main principle of the equity method is that
the initial investment is recorded at cost and
reported as a one-line item in the balance sheet of
the investor. This is why this method is
sometimes called one-line consolidation.
Advantage:
it is a simple method.
It is an acceptable practice for reporting
investment in non-controlled entities and
16. Disadvantages:
It tends to obscure the nature and
volume of the business of a venture that
conducts significant operations.
it excludes from the venturer's financial
statements assets and liabilities
It excludes from the income statements
elements of revenue and expenses
arising from the operation
It is not informative about the
economic effect of the venturer's
investment
17. Proportionate Consolidation Method
The proportionate consolidation method, an
investor consolidates in its financial statements
its proportionate share of each asset, liability,
revenue, and expense item of an investee.
Advantages:
It provides information in a venturer's
financial statements on past and prospective
changes in economic resources.
it reflects significant economic relationships
between the venturer and the jointly
controlled entity.
18. It recognizes that a part of the assets,
liabilities and operations of a joint venture
enterprise is under control of a venturer.
Disadvantage:
It is also not clear that proportionate
consolidation is more informative to users
than equity treatment used to account for
significant long-term investment.
19. Each venturer usually contributes cash or
other resources to the jointly controlled
entity. These contributions are included in
the accounting records of the venturer and
recognized in its financial statements as an
investment in the jointly controlled entity.
Generally, jointly controlled entities maybe
divided into two forms:
1. Incorporated and
2. Unincorporated
20. Incorporated
The incorporated entities, i.e. corporations
are juridical persons. An incorporated
entity owns assets, incurs liabilities and
expenses, and earns revenues in its own
name and for its own account. Being a legal
person, an incorporated entity has the right
to enter into contract in its own name, it can
sue and it can be sued.
21. Unincorporated
An unincorporated entity is not treated as
a legal person. Although the unincorporated
entity can in its name acquire assets, incur
liabilities and conduct business operations,
from a legal point of view, the owners of
the entity are directly and proportionately
in control of all the assets and liabilities.
22. The Differences between Joint Venture
and Partnership.
Joint Venture is a temporary partnership;
partnership is a long term Joint Venture.
No Basis Joint venture Partnership
1
Name of the
Venture
Joint Venture does not
have any name of
running business.
Partnership has its own
name of running
business.
2
Name of the
members
Members in Joint
Venture are Co-
Ventures
Members in partnership
firm are partners
3
Nature of
objectives
Temporary / short term
objectives are set in
joint venture
Long term objectives
are set in partnership
firm
23. Registration of
firm
No registration of
business under any law
Registration is optional,
but available
Books of
accounts
No separate set of books
are maintained in the
books of joint venture
Separate sets of books
are maintained in the
books of partnership
firm.
Freedom for
additional
business
Co-ventures have
freedom to do similar
business and complete
Partners do not have a
freedom to do similar
business and complete
Dissolution Joint venture is dissolved
as soon as its work has
been completed
Partnership is dissolved
only at the mutual
opinion of partners
Maintenance
of separate set
of books
Not necessary Mandatory
Status of Minor A minor cannot become
a co-venturer.
A minor can become a
partner to the benefits
of the firms
24. Illustration on unincorporated joint venture
Corporation ”A” and Corporation ”B” formed an
unincorporated joint venture on January 1, 2010. They agreed
to share profits or losses equally. A Corp. contributed $ 1
million in cash. B corp. contributed an ongoing business as to
which the only tangible assets are fixed assets with an original
cost of $800,000 and accumulated depreciation of $ 200,000
equaling a net book value of $ 600,000. The fixed assets
contributed by B corp. have a market value of $ 850,000.
Since the fair market value of each participant’s contribution
is considered to be equal to A corp.’s cash contribution of 1
million, the business contributed by B corp. is considered to
include joint concern value giving rise to goodwill of $
150,000. They decided to amortize the goodwill over 40 years,
i.e. $ 3,750 per year.
25. Cash $1,000,000
Fixed assets 850,000
Goodwill 150,000
A Capital 1,000,000
B Capital 1,000,000
The formation of the joint venture A&B Corp. was
recorded with the following journal entry:
Revenue $ 5,000,000
Costs and expenses 4,000,000
Net Income 1,000,000
Division of net income
A $ 500,000
B 500,000
Total $ 1,000,000
A&B Corporation (A joint venture) Income statement
For the year ended, December 31, 2010
26. A&B Corporation (A joint venture) Statement of
Venturer’s capital
For the year ended, December 31, 2010
A B Combine
Invest, Jan. $1,000,000 $1,000,000 $2,000,000
1, 1998
Add: Net income 500,000 500,000 1,000,000
Venturer’s capital at end
of year
$1,500,000 $1,500,000 $3,000,000
27. A&B Corporation (A joint venture)
Balance Sheet
December 31, 1998
Assets
Current assets $ 3,200,000
Other assets (including
unamortized goodwill)
4,800,000
Total assets 8,000,000
Liabilities and venturer’s capital
Current liabilities 1,600,000
Long-term debt 3,400,000
Venturer’s capital:
A 1,500,000
B 1,500,000 3,000,000
Total liabilities and venturer’s
capital
$ 8,000,000
28. Example 2
The two methods may be illustrated by
assuming that X Co and Y Co each invested
$400,000 for a 50% interest in an
unincorporated joint venture on January 2,
2010. Condensed financial statements for the
joint venture, XY Co, for 2010 were as follows:
29. Revenue
Costs and
expenses 1,500,000
Net Income
Division of net
income
500,000
X co. $250,000
Y co. 250,000
Total $500,000
XY Co (A joint venture) Income statement
For the year ended December 31, 2010
30. X Co Y Co. Combined
Investments, Jan. 2,
2001 $400,000 $400,000 $800,000
Add: Net income 250,000 250,000 500,000
Venturer’s capital
at end of year $650,000 $650,000 $1,300,000
XY Co (A joint venture) Statement of Venture’s capital
For the year ended, December 31, 2010
31. XY Co (A joint venture) Balance Sheet
December 31, 2010
Assets
Current assets $1,600,000
Other assets 2,400,000
Total assets 4,000,000
Liabilities and venture’s capital
Current liabilities 800,000
Long-term debt 1,900,000
Venturer’s
capital:
X co 650,000
650,000 1,300,000
32. Under the equity method of accounting, both X co.
and Y co. would prepare the following journal
entries for the investment in XY Company: Journal
entries for unincorporated joint venture under
equity method of accounting.
January 2, 2010
Investment in XY Co. 400,000
Cash 400,000
To record investment in joint venture
Dec. 31, 2010
Investment in XY Co. 250,000
Investment Income 250,000
To record share of XY Co. net income (50% x
33. Under the proportionate share method of
accounting, in addition to the two foregoing
journal entries, both X and Y companies would
prepare the following journal entry for their
respective share of the assets, liability, revenue,
and expense of XY Company: Additional
venturer's journal entries for unincorporated
joint venture under proportionate share method
of accounting.
34. December 31, 2010
Current assets (1,600,000 x 0.5) 800,000
Other assets (2,400,000 x 0.5) 1,200,000
Costs and expenses (1,500,000 x
0.5) 750,000
Investment income 250,000
Current liabilities (800,000 x 0.5) 400,000
Long-term debt (1,900,000 x 0.5) 950,000
Revenue (2,000,000 x 0.5)
1,000,000
Investment in XY co.
To record proportionate share of
joint venture's assets, liabilities,
650,000
35. Joint Venture Provisions in Ethiopia
Article 271 of the Commercial
Code of Ethiopia, defines a joint
venture as “an agreement
between partners on terms
mutually agreed and is subject to
the general principles of law
relating to partnership.”
36. According to Article 271, the following are
stated about joint ventures:
A joint venture is not made known to third
parties.
A joint venture agreement need not be in
writing and is not subject to registration and
other forms of publication required in respect
of other business organizations.
A joint venture does not have legal
personality.
Where a joint venture is made known to third
parties, it shall be deemed, insofar as such are
37. Article 278 states grounds for joint venture dissolution:
A joint venture may be dissolved on one of the following grounds:
the expiry of the term fixed by the memorandum
of association, unless there is provision for its
extension;
the completion of the venture;
failure of the purpose or impossibility of
performance;
a decision of all the partners for dissolution taken
at any time;
a request for dissolution by one partner, where
no fixed term has been specified;
dissolution by the court for good cause at the
request of one partner;
38. the acquisition by one partner of all the
shares;
death, bankruptcy or incapacity of a
partner, unless otherwise lawfully agreed;
a decision of the manager, if such power
is conferred upon him in the
memorandum of association.
39. Public Enterprises
Public Enterprises may be defined as
autonomous or semi-autonomous bodies
owned by the government agent and
engaged in providing services and or
products. The growth of public enterprises
has been partly by nationalization and
partly through creation of new ones. Some
industries are also reserved for the public
sector as a matter of national policy. Such
industries could be airways, defense
industries, railways, telecommunication and
40. Benefits of Public Enterprises
Public enterprises are highly beneficial to the
economy. In general, we can sub group the
benefits of public enterprises in to two as an
economic and social benefit.
1. Economic Benefits of Public Enterprises
Public enterprises generate revenue in the
form of divided, interest on loans, taxes, etc
Public enterprises maximize the social
welfare and developmental opportunities
of the economy, since they exploit the
natural and technological recourses of the
41. Public enterprises help in reducing
regional disparities through fair dispersal
of industries in taking in to account rural
areas of the country in proper perspective.
Public enterprises provide infrastructural
facilities that can help for the development
of the economy.
By exporting the foreign currency
generating goods and services of the
country and by substituting imported
products and services, public enterprises
can save foreign exchange.
42. Social Benefits of Public Enterprises
Public enterprises provide social benefits by
promoting welfare of the society.
Public enterprises provide job opportunity
for the society and play its role in the
reduction of unemployment.
Public enterprises provide various welfare
benefits such medical, transportation,
housing and other social benefits to
employees.
Public enterprises provide goods and
services at cheaper price to low income
groups.
43. Public enterprises play a social role by
safeguarding the interest of consumers by
offering items of good quality with a
reasonable price.
Forms of Public Enterprises
Reading assignment
Self-Test Questions
44. I. True Or False Question
1. Limited liability partnership is an unincorporated
organization
2. Private limited companies are incorporated organization
with own legal entity.
3. Public Enterprises are autonomous or semi-autonomous
bodies owned by the government and engaged in
providing services and or products.
II. Multiple choose question
1.Which one of the following is incorporated organization
A. Public limited companies c. limited liability companies
B. Private limited companies D. ALL
2. An organization running a business has the following:
the assets belong to the organization , it can create a
floating charge over its assets, charge in membership does
45. not alter its existence, and members cannot transfer their
interests to others. What types of organization is it?
A private limited company c limited liability company
B general partnership D public limited company
3. The maximum number of person who are legally allowed
to operate in a partnership is
A 2 B 20 C 50 D their is no legal limit
4. Which of the following account is opened when separate
joint venture account is opened
A joint venture account B joint bank account
c co-venturer account D all
5. Which one of the following is not a right of a partner? a)
Right to inspect the books of the firm b) Right to take
part in the affairs of the company
c) Right to share the profits/losses of the firm
d) Right to receive salary at the end of each month.
46. 6. The partners to joint venture are called
A bailor and bailee b partner’s c co-venturer
d. principal and agent
7. The proportionate method of accounting is
appropriate for;
A. Corporate joint ventures only.
B. Unincorporated joint ventures only.
C. Both corporate joint ventures and
unincorporated joint ventures.
D. Neither corporate joint ventures nor
unincorporated joint ventures.
