On 1 July 2022 Toxic Ltd enters into a joint arrangement with Sludge Ltd. Both parties commit  themselves to a contractual arrangement in which Toxic Ltd contributes plant and machinery with a fair value of  $20 million; Sludge Ltd contributes cash of $10 million and land with a fair value of $10 million, which is  considered to be a good site for the extraction of minerals. The cash that is contributed is used partly to acquire  some additional machinery at a cost of $7 million, with the balance of the cash on hand to meet operational requirements.

Additional information 

• The machinery contributed by Toxic Ltd has a carrying amount of $21 million (cost $30 million;  accumulated depreciation $9 million) and a fair value of $20 million.
• The land contributed by Sludge Ltd has a carrying amount of $8 million and a fair value of $10 million. 
• All current and future contributions are to be based on a 50:50 split, as are the future distributions of output.

For the year ending 30 June 2023, the joint operation’s manager prepares the following statement of financial position, cash flow statement and statement of pre-production costs. To date, no minerals have been removed, although the joint operators do consider that economically recoverable reserves exist. All production costs have been transferred to an asset account called ‘mining assets under construction’ in anticipation of amortising the asset as production commences.

REQUIRED

a. Prepare the journal entries that would appear in the joint operators’ own journals to record the establishment of the joint operation on 1 July 2022.

b. Prepare the journal entries that would appear in the joint operators’ own journals to record the joint operation’s transactions for the year to 30 June 2023.

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Statement of costs of production for year ending 30 June 2023 $000 Direct costs - Wages - Materials 800 600 - Management fees 600 - Other 200 2 200 Statement of cash flows for year ending 30 June 2023 $000 $000 Cash flows from operations Payments - Wages - Materials - Management fees - Other 700 500 200 200 (1 600) Cash flows from investing activities Acquisition of machinery Cash flows from financing activities From joint operator Sludge Ltd 10 000 Cash on hand at 30 June 2023 1 400 Page 1203Joint operation statement of financial position as at 30 June 2023 (7 000)