Accounting for Joint Ventures

1. Accounting for Joint Ventures

2. Meaning of Joint Venture • It is usually a temporary partnership without the use of a firm name. • It is limited to carryout a particular business plan, in which the persons concerned agree to contribute capital and to share profit (or losses). • The parties in a joint ventures are known as co- venturers. • Their liability is limited to the venture concerned for which they agree to contribute capital and share profit or losses

3. Meaning of Joint Venture • Examples of Joint ventures: >Purchase and sale of goods >Joint consignment of goods >Speculation in shares >Underwriting of shares and debentures >Construction of a building, etc

4. Characteristics of a Joint Venture • It is a temporary partnership which comes to an end after the completion of a particular venture. • It is for a specific venture, so it is a particular partnership. • The partnership is without the use of a firm name. • The main purpose it to make profit and to distribute it among all co- venturers. Loss, if any, will also be borne in agreed ratio or equally if no agreement regarding ratio has been made.

5. Difference between Joint Venture and Consignment • Relation between Parties: JV- Is that of owners. C- Is that of principle and agent. • Methods of maintaining Accounts: JV- Four methods of keeping accounts. C-Only one method of keeping accounts • Continuity of Relationship: JV- Is terminated as soon as the venture is over. C- Will be there even after one transaction. • Ownership of Goods: JV- Is that of the co- venturers. C-Remains with the consignor though possession of goods passes from the consignor to the consignee.

6. Difference between Joint Venture and Consignment • Profit earned: JV- Belongs to the co- venturers. C- Belongs to the consignor and not the consignee. • Account Sales: JV-Is not sent by one co- venturer to another. C- Is sent by the consignor to consignee. • Management: JV-Co- venturers enjoy full powers to manage the business C- The consignee being an agent has no powers except he has to obey the instruction of the consignor.

7. Difference between Joint Venture and Consignment • Finance: JV- Money is contributed by all the co- venturers in certain proportion. C-All money is invested by the consignor. • Risk: JV- Risk is shared between co- venturers. C- Sales are made at consignor’s risk. • Scope: JV- Wide as it covers many activities besides trade. C- Limited only for trade.

8. Distinction between Joint Venture & Partnership • Name of the firm: JV- It is carried on without a firms name. P- Carried on with a firm name. • Co-Venturers/Partners: JV- Parties are called co-venturers. P- Parties are called partners. • Continuity: JV- Comes to an end after completion of a particular venture. P- Continuous • Liability: JV- Limited to the venture concerned.

9. Distinction between Joint Venture & Partnership • Liability: P-Unlimited to the extent of business and private estate. • Location of Business: JV- Generally Local. P-May be located at different places. • Position of a Minor: JV-Minor is generally not admitted. P-Minor can be admitted for benefits only. • Application of the Act: JV- No enactment is applicable.

10. Distinction between Joint Venture & Partnership • Application of Act: P- Indian Partnership Act, 1932 is applicable. • No of Members: JV- Number of members can be unlimited. P- Limited to 20 in ordinary trade and 10 in banking business.

11. Methods of Recording Joint Venture Transactions • Following are the methods of recording in a Joint Venture: i) When one of the co-venturer is appointed to manage the joint venture. ii) When separate sets of books is not maintained. iii) When separate set of books is maintained. iv) When a joint venture transaction is recorded through the Memorandum Joint Venture Account.

12. A) When one co-venturer is appointed to manage the joint venture • Question 1> Ram, Mohan and Rahim were partners in a joint venture, each contributing Rs.5000. Ram purchased goods for Rs.13000 and also supplied goods worth Rs.1000 from his stock. Rahim also supplied goods worth Rs.1500 from stock and his expenses in connection with the supplying of goods on account of joint venture amounted to Rs.50. Ram paid Rs.250 for expenses in connection with the joint venture. Ram sold goods on behalf of the joint venture and realised Rs.20800. Ram was entitled to a commission of 5 percent on sales. Unsold goods amounting to Rs.500 were taken over by Mohan. Ram settled accounts of Mohan and Rahim by bank drafts. Prepare Joint venture, Mohan’s & Rahim’s accounts in Ram’s books.

13. Solution: Joint Venture account

14. Mohan’s account Rahim’s account

15. B) When separate sets of books is not maintained • Under this method, each co- venturer opens a joint venture account and personal accounts of the other co- venturers. • Problem> A and B enter into a joint venture to take a building contract for Rs.24,00,000.They provide the following information regarding the expenses incurred by them: • A B Materials 6,80,000 5,00,000 Cement 1,30,000 1,70,000 Wages --- 2,70,000 Architect’s Fee 1,00,000 --- Licence Fees --- 50,000 Plant --- 2,00,000

16. Plant was valued at Rs.1,00,000 at the end of the contract and B agreed to take it at that value. Contract amount of Rs.24,00,000 was received by Ram. Profit and losses are shared equally. You are asked to show: i) Joint Venture and B’s a/c in the books of A. ii) Joint Venture and A’s a/c in the books of B assuming that the balance due has been settled between the venturers.

17. Solution: In the books of A Joint Venture a/c

18. In the books of A B’s a/c

19. In the books of B Joint Venture a/c

20. In the books of B A’s a/c

21. C) When separate set of books is maintained • In this method, no individual co-venturer makes a record in his individual books but a complete set of double entry books is used for writing up joint venture transactions. • The accounting treatment in this method is similar to that of partnership transactions. • This method is usually followed when the co-venturers are at the same place and when the joint venture undertaken is sufficiently large.

22. Problem: • A and B undertake jointly to construct a building for a contract price of Rs.25,00,000 payable as to Rs.20,00,000 by instalments in cash and Rs.5,00,000 in the fully paid shares of the company. A bank account is opened in their joint names, A paying Rs.6,25,000 and B Rs.3,75,000. they share profit or loss in 2:1 ratio respectively. Their transactions are: Rs. Wages paid 7,50,000 Bought Materials 15,00,000 Materials supplied by A 1,00,000 Materials supplied by B 49,500 Architect’s fees paid by A 50,000

23. The contract was completed and the price duly received. The joint venture was closed by A taking up all the shares of the company at an agreed valuation of Rs.4,25,000 and B taking up stock of materials at an agreed valuation of Rs.42,500. Prepare necessary accounts.

24. Solution: Joint Venture Account

25. Joint Bank Account Share’s account

26. Co- Venturer’s account

27. D) Memorandum Joint Venture Account Method • This method is followed when each co- venturer in a joint venture wants to make a record of joint venture transactions in his books. • This method is an alternative of (B) method and operates as follows: i> Every co- venturer will open a personal account called Joint Venture with-(name of the other co- venturer) Account. ii> In addition to the personal accounts, a Memorandum Joint Venture account is also opened to ascertain profit or loss. iii>The balance in Joint Venture with-… account will show the amount due to or due from the other co- venturer.

28. Problem: • A and b entered into a joint venture of underwriting the subscription at par of 50,000 shares of Rs.10 each of a joint stock company. Their profit sharing ratio being 3:2 respectively. The consideration for guaranteeing the subscription was 500 other shares of the Rs.10 each fully paid to be issued by them. the public took up 48,000 shares and remaining shares of the guaranteed issue were taken by A and B who provide cash equally. The entire shareholding of the venture was then sold through other brokers, 60% at a price of Rs.9.50 less brokerage 50 paise per share, 20% at Rs.9.75 less brokerage 50 paise per share and the balance was taken over by A and

29. B equally at Rs.9 per share. The share proceed were collected by A. Show Memorandum Joint Venture and Joint Venture with B in the books of A and Joint venture with A in the books of B assuming the final settlement of accounts was made between A and B. Memorandum Joint Venture Account

30. Joint Venture with B Joint Venture with A

31. Interest • Problem> V and W entered into a joint venture for purchase and sale of cotton. Their profit ratio being 2:1 and are also entitled to an interest of 12%/annum(on monthly basis) on money received as well as invested. Following transactions took place: On 1.1.2010, V purchased 1000 bales of cotton@Rs500/bale, brokerage being Rs10/bale On 28.2.2010, W purchased 500 bales of cotton@Rs520/bale, brokerage being Rs10/bale 0n 28.2.2010,V sold 800 bales@Rs672/bale, brokerage being Rs12/bale and took proceeds to himself. 0n 1.4.2010,W sold 600 bales@Rs580/bale, brokerage being Rs10/bale and took proceeds to himself.

32. It was also agreed that each co- venturer will at first sell from his own purchases and then, if need be, from the goods purchased by the other co-venturer . The balance stock left unsold was taken by V at cost on 30.4.2010 when the accounts were settled between the coventurers. You are required to show the accounts as would appear when maintained in a separate set of books.

33. Solution: Joint Venture account

34. V’s account W’s account

35. Joint Bank Account

36. Conversion Of Consignment Into Joint Version • Problem> On 1.4.2010 R consigned 100 table fans to S of Panipat, each costing Rs200.They were invoiced at Rs250 each. Freight and insurance charger paid by R amounted to Rs500. 5 table fans were damage in transit and on 30.6.2010 R received Rs500 on account of damaged fan from the insurance company. S took the delivery and accepted the a bill for Rs10,000 for 3 months. R got it discounted at 12%/annum. On 30.6.2010, S sent an account sales showing: 85 table fans @Rs260 were sold Damaged fans sold @Rs130/fan

37. He had incurred the following expenses: Rs. Octroi and carriage inwards 200 Godown expenses 200 Selling Expenses 500 S is entitled to a commission of Rs.20 per table fan sold plus 1/5th of the amount by which the gross sales proceeds exceeds a sum calculated at the invoice price. The commission is not payable on the sale of damaged fans. S remitted the balance due from him. After the preparations of the accounts it was decided that the relationship between R and S should be one of joint venture, the cost of table fan being taken at Rs220. under new agreement S is entitled to commission of 5%on all sales and R is entitled to interest @12%p.a on his capital outlay. R’s accounting year ends on 30.6.2010

38. Consignment To Panipat account

39. Goods Sent On Consignment Account S’s Account

40. Memorandum Joint Venture Acccount

41. Thank you