Larry Ltd, Curly Ltd and Moe Ltd entered into a joint operation on 1 July 2019 to
Question:
Larry Ltd, Curly Ltd and Moe Ltd entered into a joint operation on 1 July 2019 to explore and mine gold in Papua New Guinea. The economic life of the joint venture is 10 years. The joint venture agreement states that each operator will contribute the following assets to establish the joint operation and to provide for initial running costs.
The fair value of the amounts contributed is shown in the following table:
From Larry Ltd Exploration and Evaluation Asset PPE
Cash 2,000,000
1,000,000
1,000,000
4,000,000
From Curly Ltd
Cash 6000,000
6,000,000
From Moe Ltd PPE
Cash 3,000,000
3,000,000
6,000,000
The contractual arrangement is that the operators divide extracted gold in proportion to their contributions to establish the joint operation, that is, the ratio 25:37.5:37.5. The operators meet the costs of production in the same proportions. The joint operation is managed by Larry Ltd who is entitled to receive a yearly fee of $130,000 annually.
The cash contributed by the operators is used by the manager to purchase additional property plant and equipment at a cost of $8,000,000 from independent third parties. These assets are held as tenants in common in proportion to the operators’ contribution ratio 25:37.5:37.5.
The Exploration and Evaluation Asset had been recorded in the books of Larry Ltd at $1,200,000. The property plant and equipment contributed to the joint venture by Beers Ltd was originally purchased for $3,000,000 with accumulated depreciation of $1,400,000 at 1 July 2019. This asset is considered impaired. Larry Ltd decides not to revalue its remaining interest in the non-current assets contributed to the joint operations. The PPE contributed by Moe Ltd was new and recorded at $6,000,000. The following was extracted from the accounting records kept by the joint venture manager for the year ending 30 June 2020.
Joint venture balance sheet extract at 30 June 2020
Cash and cash equivalents 480,000
Supplies 200,000
Undistributed gold 1,000,000
Exploration and Evaluation Asset 2,000,000
Property Plant and Equipment 12,000,000
Accounts payable and Wages payable (1,000,000)
Net assets 14,680,000
Joint venture cash receipts and payments for the year ended 30 June 2020 Cash contributions from operators 10,000,000
Less: Cash payments Plant and Equipment (8,000,000)
Wages (900,000)
Materials and supplies (350,000)
Utilities (150,000)
Management fee (120,000)
Cash balance at the end of the period 480,000
Cost of production statement for the year ended 30 June 2020 Wages paid 900,000
Wages payable 200,000
1,100,000 Materials and supplies paid 350,000
Materials and supplies payable 150,000
Less: Materials and supplies on hand (200,000)
300,000 Utilities 300,000 Management fee
120,000 Total production cost 1,820,000
Less: Undistributed Gold 1,000,000
Cost of gold distributed 820,000 By 30 June 2020 both Larry Ltd and Curly Ltd had sold 60% of their share of output while Moe Ltd had sold 50% of its share of output.
All three operators make sales to customers at a mark-up of 40% on the full cost. Prepare the required entries for each operator for the year ended 30 June 2020
Expert Answer:
