1. Big, Medium and Small Action are three incorporated charities. All three provide ongoing assistance to communities in developing countries. Recently, a benefactor donated the patent rights to a revolutionary water micro-filter to Big on the condition that the charity use the patent to provide clean water in needy communities. The water filter costs little to manufacture, can be reused many times and can produce safe drinking water even from highly polluted water sources. Big does not possess the resources to develop the water filter on its own and after discussions with Medium and Small Action, the three charities sign an agreement to form a joint operation, ‘Cleancup’ on the 1 July 2017, with the aim of setting up the manufacture and distribution of the water filters. Big agrees to contribute the patent rights, Medium will contribute equipment and factory space and Small Action will contribute cash. Medium also agrees to act as joint operation manager to oversee the day-to-day manufacturing operations for an annual fee of $330,000.

The agreement is that all costs will be shared equally by the three joint operators. The water filters will be manufactured and then distributed equally between the operators for sale or donation. The financial and record keeping management are the responsibility of the joint operation manager. However, each operator will determine and separately charge their own periodic depreciation and amortisation expense. Each operator guarantees further cash contributions to the joint venture as required.

The initial contributions to the Cleancup joint operation are as follows:

Joint Operator	Asset contributed	Book value at 1 July 2017	Fair value
Big	Patent	$2,200,000 (zero accumulated amortisation)	$5,500,000
Medium	Equipment	$2,200,000 (cost $2,750,000, accumulated depreciation $550,000)	$2,200,000
Small	Factory	$1,750,000 (cost $3,300,000, accumulated depreciation $1,375,000)	$3,300,000
Small Action	Cash	$5,500,000	$5,500,000

The patent has a finite economic life of 10 years with a zero residual value at 1 July 2017. The equipment and factory both have a remaining economic life of 8 years at 1 July 2017, with a zero residual value. All three joint operators use the straight-line method of depreciation and amortisation. Both Big and Medium have chosen not to revalue their remaining interest in the non-current assets contributed to the Cleancup joint venture.

The financial statements prepared by the joint operation manager for the year ended 30 June 2018 are as follows:

Cleancup Joint Operation Statement of Financial Position at 30 June 2018

	$		$
Cash and cash equivalents	1,265,000	Operators’ interest	11,574,750
WIP inventories	445,500
Patent	5,500,000	Trade payables	1,017,500
Equipment	2,200,000	Accrued wages	118,250
Factory	3,300,000
Total	12,710,500		12,710,500

Cleancup Joint Operation Statement of Cash Receipts and Payments

Year Ended 30 June 2018

	$
Contribution received 1 July 2017	5,500,000
Less cash payments:
Wages and Salaries	(1,732,500)
Supplies and materials	(1,793,000)
Manufacturing Overheads	(825,000)
Management fees	(330,000)
Cash balance at 30 June 2018	819,500

Cleancup Joint Operation Statement of Costs of Production

Year Ended 30 June 2018

	$
Wages and Salaries	1,850,7500
Supplies and materials	2,172,500
Manufacturing Overheads	1,017,500
Management fees	330,000
WIP Inventory	(445,500)
Total Costs Incurred	4,925,250

During the first year, the joint operation produced a range of different water filters and each operator received and sold 90% of their share of this output by the end of the period. Big’s share of output was sold for $3,300,000, Medium sold their share of output for $3,575,000 and Small Action sold their share of output for $2,300,000.

Required:

Prepare the general journal entries for the year ended 30 June 2018 for Medium in respect of the Cleanup joint operation, assuming no entries have been made for the year ended 30 June 2018. Medium uses the line-by-line method to account for its interest in the joint operation, in accordance with AASB11: Joint Arrangements. (Please work in whole dollars. Small rounding errors will not be penalized).

Answer rating: 100% (QA)

ANSWER A joint arrangement whereby the parties that have joint control of the arrangement have right... View the full answer