MCM604_Advanced Financial Accounting

Group Financial Statements 143 (a) Depreciation on Machinery ` 24,000 (b) Goodwill written off ` 8,000 (c) Loss on sale of Machinery ` 2,000 (d) Details of current assets and current liabilities: Particulars 31.3.2014 31.3.2015 ` ` Stock 1,40,000 1,70,000 Cash 1,30,000 1,00,000 Debtors 1,10,000 94,000 Creditors 90,000 1,00,000 O/s Rent 10,000 6,000 Bills Payable 80,000 70,000 Bills Receivable 90,000 1,06,000 From the above information calculate the cash from operations. Ans: Cash from operations` 3,60,000 Q.11From the following balance sheets of Arvind Ltd., you are required to prepare a Cash flow statement. Liabilities 1997 1998 Assets 1997 1998 Share Capital 4,00,000 5,00,000 Cash 60,000 94,000 Trade Creditors 1,40,000 90,000 Debtors 2,40,000 2,30,000 P & L A/c 20,000 46,000 Stock 1,60,000 1,80,000 Land 1,00,000 1,32,000 5,60,000 6,36,000 5,60,000 6,36,000 Ans: Cash from operations: ` 34,000), Net cash inflow: ` 34,000 CU IDOL SELF LEARNING MATERIAL (SLM)

144 Advanced Financial Accounting B. Multiple Choice/Objective Type Questions 1. Advantage of holding company is ___________. [a] Minority interest [b] Benefits of Monopolies [c] Understatement of figures [d] Secret Reserve 2. Financial statements normally includes ___________. [a] Consolidated balance sheet [b] Consolidated statement of profit or loss [c] Other statements and explanatory materials [d] All of the above 3. Documents that are needed to be attached to the balance sheet of a holding company are ___________. [a] A copy of receipts [b] A copy of the Balance sheet of the subsidiary [c] A copy of debts acquired by the company [d] None 4. Holding of the general public in the subsidiary company is called as ___________. [a] Minority interest [b] Elimination of investment account [c] Cost of control or goodwill [d] Revenue profits 5. Proposed Dividend is ___________. [a] Dividend paid by the subsidiary company may be partly out of capital [b] Amount of dividend is already received minority share of the revenue dividend has to be ignored CU IDOL SELF LEARNING MATERIAL (SLM)

Group Financial Statements 145 [c] Dividend might have been proposed but not yet paid by the subsidiary [d] None 6. Cash flow statement was revised and issued in the year ___________. [a] March 1997 [b] April 1997 [c] May 1997 [d] June 1997 7. Methods for determining cash from operation are ___________. [a] Cash sales method [b] Adjustment of Current Account to Fund From operations [c] Net Profit Method (AS 3) [d] All of the above 8. Cash flow statement is especially useful in preparing ___________. [a] Cash budgets [b] Goodwill [d] Reserves [d] Balance sheet 9. Fund flow statement deals with ___________. [a] Funds [b] Cash transactions [c] Both [a] and [b] [d] None 10. Which activities are the main revenue producing activities of the enterprise? [a] Operating activities [b] Investing activities [c] Financing activities [d] All of the above Answer 1. [b], 2. [d], 3. [b], 4. [a], 5. [c], 6. [a], 7. [d], 8. [a], 9. [c], 10. [a]. CU IDOL SELF LEARNING MATERIAL (SLM)

146 Advanced Financial Accounting 7.11 References 1. Arulanandam and Raman, Advanced Accountancy, Himalaya Publication House Pvt. Ltd., Edition 2018. 2. Dr. Vishwanathan Reddy and Jayaram Kanzal, Corporate Accounting, Himalaya Publication House Pvt. Ltd., Edition 2019 3. Dr. S.N. Maheswari, Financial Accounting, Vikas Publication, Edition 2017. 4. S.P. Jain and K.L. Narang, Financial Accounting, Kalyani Publication, Edition 2018. 5. http://www.mca.gov.in/MinistryV2/accountingstandards1.html 6. https://www.icaew.com/technical/by-country/north-america/us/accounting-in-us/us-gaap 7. https://www.ifrs.org/issued-standards/list-of-standards/ 8. http://www.accountingnotes.net/final-accounts/final-accounts-of-the-companies-with- solutions-accounting ˆˆˆ CU IDOL SELF LEARNING MATERIAL (SLM)

Segmental Reporting 147 UNIT 8 SEGMENTALREPORTING Structure: 8.0 Learning Objectives 8.1 Introduction 8.2 Meaning and Definitions 8.3 Need for Segmental Reporting 8.4 Objectives of Segmental Reporting 8.5 Scope of Segmental Reporting 8.6 Arguments against Segmental Reporting 8.7 Summary 8.8 Key Words/Abbreviations 8.9 LearningActivity 8.10 Unit End Questions (MCQs and Descriptive) 8.11 References 8.0 Learning Objectives After studying this unit, you will be able to: z Learn the concept of Segment Reporting z Learn the introduction of Segment Reporting z Discuss the arguments against Segmental Reporting CU IDOL SELF LEARNING MATERIAL (SLM)

148 Advanced Financial Accounting 8.1 Introduction Segment reporting is the reporting of the operating segments of a company in the disclosures accompanying its financial statements. Segment reporting is required for publicly-held entities, and is not required for privately held ones. The basic goal of a country’s economy is to maximise the economic and social welfare of its citizens through an efficient allocation of resources. In developing economies, chartered by inadequate resources, capital is the scarcest and most important productive factor. To obtain their capital at a lower cost, the business enterprises and companies in particular, go to the capital market. 8.2 Meaning and Definitions Meaning Information about multiple products/services and their operation in different geographical areas are called segment information. Such information is used to assess the risk and return of multiple products/services and their operations in different geographical areas. Disclosure of such information is called Segment reporting. Segment reporting helps users of financial statements. (a) To better understand the performance of the enterprise. (b) To better assess the risks and returns of the enterprises. (c) To make more informed judgments about the enterprise as a whole. Definitions (a) Business Segment: Segment is made on the basis of products/services, which are exposed to different risks and returns. (b) Geographical Segment: Segment is made on the basis of its operation in different geographical areas which are exposed to different risks and returns. Accounting Treatment Reportable segment is a business segment or a geographical segment identified on the basis of its definition for which segment information is required to be disclosed by the statement. CU IDOL SELF LEARNING MATERIAL (SLM)

Segmental Reporting 149 Reportable Segments: Reportable segments are classified into following two parts for the purpose of disclosure. (a) Primary Reportable Segment (b) Secondary Reportable Segment Segment Reporting 1. Segment Revenue Segment Revenue reported in the statement of profit and loss of an enterprise that is directly attributable to a segment and the relevant portion of enterprise revenue that can be allocated on a reasonable basis to a segment, whether from sales external customers or from transactions with other segments of the same enterprise. Segments revenue does not include: (a) Extraordinary’ items. (b) Interest or dividend income, including interest earned on advances or loans to other segments, unless the operations of the segment are primarily of a financial nature. (c) Gain on sales of investments or gains on extinguishment of debt, unless the operations of the segment are primarily of a financial nature. 2. Segment Expense Segment Expense is an Expense resulting from the operating activities of a Segment that is directly attributable to the segment and the relevant portion of an expense that can be allocated on a reasonable basis to a segment, including expenses relating to sales to external customers and expenses relating to transactions with other segments of the same enterprise. Segment expense does not include (As per AS 17): (a) Extraordinary items. (b) Interest, including interest incurred on advances or loans from other segments unless the operations of the segment are primarily of a financial nature. (c) Losses on sale of investments or losses on extinguishment of debt unless the operations of the segment are primarily of a financial nature. CU IDOL SELF LEARNING MATERIAL (SLM)

150 Advanced Financial Accounting (d) Income tax expense. (e) General administrative expenses, head office expenses, and other expenses that arise at the enterprise level and relate to the enterprise as a whole. However, costs are sometimes incurred at the enterprise level on behalf of a segment such costs are segment expenses if they relate to the segment’s operating expenses and if they can be directly attributed or allocated to the segment on a reasonable basis. 3. Segment Result Segment result is Segment revenue less Segment expenses. 4. Segment Assets Segment Assets are those operating assets that are used by a segment in its operating activities and that either are directly attributable to the segment or can be allocated to the segment on a reasonable basis. 5. Segment Liabilities Segment Liabilities are those operating liabilities which result from the operating activities of a division and either are directly attributable to the division or can be allocated to the division on a reasonable basis. 6. Segment Accounting Policies Segment accounting policies are accounting policies framed for preparing and presenting the financial statement of the enterprise as well as those accounting policies that relate specifically to segment reporting. 8.3 Need for Segmental Reporting Diversified companies present a unique type of problem for investment decision making. The performance of a diversified company can be judged from the performance of all several segments. The success of diversified company depends on success of all segments that is why segmental disclosures in company’s annual reports are more useful to investors and other user groups. CU IDOL SELF LEARNING MATERIAL (SLM)

Segmental Reporting 151 Institute of Chartered Accountants of India has emphasized on segment reporting reason being, it can be helpful to the users of financial statements in many ways: (i) Users of financial statements can better understand the performance of an enterprise. (ii) Users can better assess the risks and return of an enterprise. (iii) Users can make more informed judgment about the enterprise judgment about the enterprise as a whole. (iv) Users can benefit from an enhanced degree of comparability with other enterprises. 8.4 Objective of Segmental Reporting The objective of this Standard is to establish principles for reporting financial information, about the different types of products and services an enterprise produces and the different geographical areas in which it operates. Such information helps users of financial statements: (a) better understand the performance of the enterprise; (b) better assess the risks and returns of the enterprise; and (c) make more informed judgements about the enterprise as a whole. Many enterprises provide groups of products and services or operate in geographical areas that are subject to differing rates of profitability, opportunities for growth, future prospects, and risks. Information about different types of products and services of an enterprise and its operations in different geographical areas – often called segment information – is relevant to assessing the risks and returns of a diversified or multi-locational enterprise but may not be determinable from the aggregated data. Therefore, reporting of segment information is widely regarded as necessary for meeting the needs of users of financial statements. 8.5 Scope of Segmental Reporting 1. This Standard should be applied in presenting general purpose financial statements. 2. The requirements of this Standard are also applicable in case of consolidated financial statements. CU IDOL SELF LEARNING MATERIAL (SLM)

152 Advanced Financial Accounting 3. An enterprise should comply with the requirements of this Standard fully and not selectively. 4. If a single financial report contains both consolidated financial statements and the separate financial statements of the parent, segment information need be presented only on the basis of the consolidated financial statements. In the context of reporting of segment information in consolidated financial statements, the references in this Standard to any financial statement items should construed to be the relevant item as appearing in the consolidated financial statements. 8.6 Arguments against Segmental Reporting Arguments advanced against segment reporting may be listed as follows: 1. Investment by investors and creditors is made in a company and not in its individual segments. Therefore, investors require information for the company as a whole for making proper decisions. In a study, it was found that the majority of the companies did not believe that segment information was relevant to the investors’ decisions. Although the investors invest in a company but a company is made of its different segments and segment information is very useful in making better analysis of the risk-return characteristics of the investment. Therefore, better predictions of both risk and future performance may be made from disaggregated data. Information about the make-up of a business is also useful to an investor in seeking a desired balance in his portfolio. If such information is lacking, an investor may unknowingly maintain too large a commitment in some one field of industry or he may pass up investment opportunities because he fails to understand and evaluate them correctly in the light of his own objectives. 2. Segment information might be misleading to the investors and other external users who read it. Operating data by segments are developed for internal management users and often arbitrary judgments are made by management for developing such segment data. Although the nature and limitations of segment data are known to internal management CU IDOL SELF LEARNING MATERIAL (SLM)

Segmental Reporting 153 users, external users have difficulty in understanding them and using them in investment decisions. The limitations of segment data are inherent in the nature of accounting as a means of communicating information about a business segment. This is true in the communication of information at the company level also. Accounting is handicapped in disclosing all the information that is necessary in investment decisions. For instance, accounting cannot directly provide information about the physical condition of a company’s plants or the competence of company managements. Similarly, a segment whose products are still in the developing stage may compare unfavourably with another segment whose products are well-developed. The products in developing stage may be as essential to the company as the developed products and sometimes developing products need to be pushed at the cost of more developed (profitable) products. However, accounting is unable to communicate such information clearly, consequently, investors and creditors, being not aware of limitations of accounting, may arrive at wrong conclusions in investment decision-making. However, it is impracticable to cater for careless users of financial statements, they could misuse or ignore any information, aggregated or disaggregated, that is presented. 8.7 Summary Segment reporting is the reporting of the operating segments of a company in the disclosures accompanying its financial statements. Segment reporting is required for publicly-held entities, and is not required for privately held ones. Information about multiple products/services and their operation in different geographical areas are called segment information. CU IDOL SELF LEARNING MATERIAL (SLM)

154 Advanced Financial Accounting Reportable segment is a business segment or a geographical segment identified on the basis of its definition for which segment information is required to be disclosed by the statement. Segment Revenue reported in the statement of profit and loss of an enterprise that is directly attributable to a segment and the relevant portion of enterprise revenue that can be allocated on a reasonable basis to a segment, whether from sales external customers or from transactions with other segments of the same enterprise. Diversified companies present a unique type of problem for investment decision making. The performance of a diversified company can be judged from the performance of all several segments. Segment Expense is an Expense resulting from the operating activities of a Segment that is directly attributable to the segment and the relevant portion of an expense that can be allocated on a reasonable basis to a segment, including expenses relating to sales to external customers and expenses relating to transactions with other segments of the same enterprise. The objective of this Standard is to establish principles for reporting financial information, about the different types of products and services an enterprise produces and the different geographical areas in which it operates. Investment by investors and creditors is made in a company and not in its individual segments. Therefore, investors require information for the company as a whole for making proper decisions 8.8 Key Words/Abbreviations z Segment Reporting: A segment can be defined in many ways, but one prevailing view is that it is a discrete business unit for which separate financial information is prepared and evaluated by an operating decision maker within the organization. z Segment Expense: Segment Expense is an Expense resulting from the operating activities. z Investment: Investment by investors and creditors is made in a company and not in its individual segments. Therefore, investors require information for the company as a whole for making proper decisions. In a study, it was found that the majority of the companies did not believe that segment information was relevant to the investors’ decisions. CU IDOL SELF LEARNING MATERIAL (SLM)

Segmental Reporting 155 8.9 Learning Activity 1. Give the meaning and definitions of Segment Reporting. _________________________________________________________________ _________________________________________________________________ 2. Explain the objectives and scope of segment reporting. _________________________________________________________________ _________________________________________________________________ 3. Discuss about the arguments against segmental reporting. _________________________________________________________________ _________________________________________________________________ 8.10 Unit End Questions (MCQs AND DESCRIPTIVE) A. Descriptive Type Questions 1. What is the need for segment reporting? 2. Explain the limitations of segment reporting B. Multiple Choice/Objective Type Questions 1. Segment result is Segment revenue less __________. [a] Segment revenue [b] Segment assets [c] Segment expenses [d] None 2. Segment Expenses does not include as per [a] AS 15 [b] AS 17 [c] AS 16 [d] AS 18 CU IDOL SELF LEARNING MATERIAL (SLM)

156 Advanced Financial Accounting Answers 1. [c], 2. [b] 8.11 References 1. Arulanandam and Raman, Advanced Accountancy, Himalaya Publication House Pvt. Ltd., Edition 2018. 2. Dr. Vishwanathan Reddy and Jayaram Kanzal, Corporate Accounting, Himalaya Publication House Pvt. Ltd., Edition 2019 3. Dr. S.N. Maheswari, Financial Accounting, Vikas Publication, Edition 2017. 4. S.P. Jain and K.L. Narang, Financial Accounting, Kalyani Publication, Edition 2018. 5. http://www.mca.gov.in/MinistryV2/accountingstandards1.html 6. https://www.icaew.com/technical/by-country/north-america/us/accounting-in-us/us-gaap 7. https://www.ifrs.org/issued-standards/list-of-standards/ 8. http://www.accountingnotes.net/final-accounts/final-accounts-of-the-companies-with- solutions-accounting 9. http://www.accountingnotes.net/amalgamation/external-reconstruction-and-amalgamation 10. http://www.yourarticlelibrary.com/accounting/problems-accounting/amalgamation-and- external-reconstruction ˆˆˆ CU IDOL SELF LEARNING MATERIAL (SLM)

International Scenario 157 UNIT 9 INTERNATIONAL SCENARIO Structure: 9.0 Learning Objectives 9.1 Introduction 9.2 International Scenario 9.3 Indian Scenario 9.4 Requirements 9.5 Summary 9.6 Key Words/Abbreviations 9.7 LearningActivity 9.8 Unit End Questions (MCQs and Descriptive) 9.9 References 9.0 Learning Objectives After studying this unit, you will be able to: z Learn the concept of International Scenario z Discuss the definition of Indian Scenario z Explain the disclosure requirements CU IDOL SELF LEARNING MATERIAL (SLM)

158 Advanced Financial Accounting 9.1 Introduction Accounting has no meaning without standards due to professionalism. The use and application of standards in accounting gets so importance that it will not go wrong if it is termed as a legal discipline. By the time, the world has given accounting the certification of international discipline. So, it is apt to say that as an international discipline, accounting should have a single set of standards for all for harmonizing the practice in a global scenario. But the reality is that we still have various streams of accounting standards like US GAAP, UK GAAP, IAS, and so on. These different streams are the threat for accounting against its harmonization of practices. Though the world has witnessed a lot of initiatives taken to reduce the streams into one in recent years, still we cannot ensure the final sophistication in this regard. The paper focuses on the convergence issue, its current status, challenges with special reference to Indian perspective. The International Organization for Standardization (ISO)’s 31010: Risk Assessment Techniques standard describes scenario analysis as, “the development of descriptive models of how the future might turn out.” ISO goes on to say scenario analysis “can be used to identify risks by considering possible future developments and exploring their implications. Sets of scenarios reflecting (for example) ‘best case’, ‘worst case’ and ‘expected case’ may be used to analyze potential consequences and their probabilities for each scenario as a form of sensitivity analysis when analyzing risk.” 9.2 International Scenario The International Financial Reporting Standards (IFRS) The International Financial Reporting Standards (IFRS) are accounting standards that are issued by the International Accounting Standards Board (IASB) with the objective of providing a common accounting language to increase transparency in the presentation of financial information. IASB The International Accounting Standards Board (IASB), is an independent body formed in 2001 with the sole responsibility of establishing the International Financial Reporting Standards (IFRS). It succeeded the International Accounting Standards Committee (IASC), which was earlier given the responsibility of establishing the international accounting standards. IASB is based in London. CU IDOL SELF LEARNING MATERIAL (SLM)

International Scenario 159 It also provided the ‘Conceptual Framework for Financial Reporting’ issued in September 2010 which provides a conceptual understanding and the basis of the accounting practices under IFRS. 9.3 Indian Scenario Generally Accepted Accounting Principles (GAAP) Generally Accepted Accounting Principles (GAAP) are the basic accounting principles and guidelines which provide the framework for more detailed and comprehensive accounting rules, standards and other industry-specific accounting practices. For example, the Financial Accounting Standards Board (FASB) uses these principles as a base to frame their own accounting standards. The objectives of scenario analysis vary, but the process is generally: 1. Setting an intended objective and determining the context (internal and external environment) in which that objective needs to be achieved; 2. Determining a limited series of possible outcomes and the assumptions underlying the achievement of those outcomes; 3. Identifying, analyzing, and evaluating events positive (opportunities) or negative (threats) that may or may not occur, which range from the probable to the highly improbable and might enable or thwart achievement of those outcomes; 4. Considering existing strengths and weaknesses in an organization’s staff, procedures, and resources to deal with an event or its possible consequences; and 5. Determining a series of supplementary actions needed to appropriately address the remaining and unwanted risk. 9.4 Requirements What ways can professional accountants provide unique contributions to scenario analysis exercises? As we are typically involved in the information provision processes of organizations, we can facilitate effective scenario analysis by providing participants with high-quality information, including explicit understanding of related risks and their potential consequences. Accountants can use scenario CU IDOL SELF LEARNING MATERIAL (SLM)

160 Advanced Financial Accounting analysis to improve the efficient management of resources, corporate governance, and the facilitation of information. To help facilitate efficient management of resources, accountants can provide cost/benefit analyses to assess potential impacts of scenarios. It can also plan for the movement or re-allocation of capital and other resources necessary to implement the measures deemed necessary based on the outcomes of the scenario analysis exercises. To plan for capital and other reserves to create sufficient resilience for dealing with certain events. On the risk and governance front, we can advise on the possible responses that leave organizations vulnerable and recommend establishing internal controls, and the most appropriate internal controls for the organization. We can also suggest improvements for corporate governance arrangements to change behavior and organizational procedures. 9.5 Summary The use and application of standards in accounting gets so importance that it will not go wrong if it is termed as a legal discipline. The International Financial Reporting Standards (IFRS) are accounting standards that are issued by the International Accounting Standards Board (IASB) with the objective of providing a common accounting language to increase transparency in the presentation of financial information. Generally AcceptedAccounting Principles (GAAP) are basic accounting principles and guidelines which provide the framework for more detailed and comprehensive accounting rules, standards and other industry-specific accounting practices As we are typically involved in the information provision processes of organizations, we can facilitate effective scenario analysis by providing participants with high-quality information, including explicit understanding of related risks and their potential consequences. CU IDOL SELF LEARNING MATERIAL (SLM)

International Scenario 161 9.6 Key Words/Abbreviations z IFRS: IFRS are accounting standards that are issued by the International Accounting Standards Board (IASB). z IASB: The International Accounting Standards Board (IASB) is an independent body formed in 2001. z Indian Scenario: Determining a limited series of possible outcomes. 9.7 Learning Activity 1. Explain about the International Scenario. _________________________________________________________________ _________________________________________________________________ 2. Discuss about the Indian Scenario. _________________________________________________________________ _________________________________________________________________ 9.8 Unit End Questions (MCQs and Descriptive) A. Descriptive Type Questions 1. Explain about ISO. 2. What are the requirements in scenario analysis? B. Multiple Choice/Objective Type Questions 1. ______ provides a common accounting language to increase transparency in the presentation of financial information. [a] IASB [b] IFRS [c] GAAP [d] None CU IDOL SELF LEARNING MATERIAL (SLM)

162 Advanced Financial Accounting 2. IASB was formed in __________. [a] 2000 [b] 2002 [c] 2001 [d] 2003 Answers 1. [b], 2. [c] 9.9 References 1. Arulanandam and Raman, Advanced Accountancy, Himalaya Publication House Pvt. Ltd., Edition 2018. 2. Dr. Vishwanathan Reddy and Jayaram Kanzal, Corporate Accounting, Himalaya Publication House Pvt. Ltd., Edition 2019 3. Dr. S.N. Maheswari, Financial Accounting, Vikas Publication, Edition 2017. 4. S.P. Jain and K.L. Narang, Financial Accounting, Kalyani Publication, Edition 2018. 5. http://www.mca.gov.in/MinistryV2/accountingstandards1.html 6. https://www.icaew.com/technical/by-country/north-america/us/accounting-in-us/us-gaap 7. https://www.ifrs.org/issued-standards/list-of-standards/ 8. http://www.accountingnotes.net/final-accounts/final-accounts-of-the-companies-with- solutions-accounting 9. http://www.accountingnotes.net/amalgamation/external-reconstruction-and-amalgamation 10. http://www.yourarticlelibrary.com/accounting/problems-accounting/amalgamation-and- external-reconstruction ˆˆˆ CU IDOL SELF LEARNING MATERIAL (SLM)

Accounting and Auditing Issues 163 UNIT 10 ACCOUNTINGAND AUDITING ISSUES Structure: 10.0 Learning Objectives 10.1 Introduction 10.2 Accounting andAuditing Issues 10.3 Segmental Reporting 10.4 Problems of Segmental Reporting 10.5 Difficulties in Segment Reporting 10.6 Segmental Disclosure 10.7 Summary 10.8 Key Words/Abbreviations 10.9 LearningActivity 10.10 Unit End Questions (MCQs and Descriptive) 10.11 References 10.0 Learning Objectives After studying this unit, you will be able to: z Learn the concept of accounting and auditing issues z Discuss the Segmental Reporting problems and difficulties CU IDOL SELF LEARNING MATERIAL (SLM)

164 Advanced Financial Accounting z Explain the specific issues relating to Management Accountants z Learn the concept of Segmental Disclosure 10.1 Introduction Accounting Standards are employed as one of the main compulsory regulatory mechanisms for preparation of general-purpose financial reports and subsequent audit of the same, in almost all states of the globe. Accounting standards are concerned with the scheme of measurement and disclosure principles for the provision and demonstration of financial statements. They come out with a set of important statements of how particular types of proceedings, events and other costs should be known and reported in the financial statements. Accounting standards are devised to supply useful information to different users of the financial statements, to such as shareholders, creditors, lenders, management, investors, suppliers, competitors, researchers, regulatory bodies and social club at large and so alone. In fact, such assertions are planned and prescribed so as to improve and benchmark the quality of financial coverage. 10.2 Accounting and Auditing Issues Accounting and Auditing Issues of the most significant new accounting and auditing standards and important projects. It does so by identifying the events of the past year that have developed into hot issues and reviewing the opportunities and pitfalls presented by these changes. The topics reviewed in this course were selected because of their impact on financial reporting and because of the role they play in understanding the accounting landscape in the year ahead. 10.3 Segmental Reporting Segment reporting is the reporting of the operating segments of a company in the disclosures accompanying its financial statements. Segment reporting is required for publicly-held entities, and is not required for privately held ones. Segment reporting is intended to give information to investors and creditors regarding the financial results and position of the most important operating units of a company, which they can use as the basis for decisions related to the company. CU IDOL SELF LEARNING MATERIAL (SLM)

Accounting and Auditing Issues 165 Under Generally Accepted Accounting Principles (GAAP), an operating segment engages in business activities from which it may earn revenue and incur expenses, has discrete financial information available, and whose results are regularly reviewed by the entity’s chief operating decision maker for performance assessment and resource allocation decisions. Follow these rules to determine which segments need to be reported: Aggregate the results of two or more segments if they have similar products, services, processes, customers, distribution methods, and regulatory environments. Report a segment if it has at least 10% of the revenues, 10% of the profit or loss, or 10% of the combined assets of the entity. If the total revenue of the segments you have selected under the preceding criteria comprise less than 75% of the entity’s total revenue, then add more segments until you reach that threshold. 10.4 Problems of Segmental Reporting Arguments against disclosure of information about segments of a diversified company generally emphasize practical difficulties. The opponents acknowledge the importance of segment reporting for investors. However, the critics point out two basic problems: (i) Misunderstanding likely to be found among investors about segment information. (ii) Potential detriment to the reporting company of disclosing information about individual segments. 10.5 Difficulties in Segment Reporting The difficulties involved in segment reporting relate to implementation of segment reporting rather than to its concept and theory. CU IDOL SELF LEARNING MATERIAL (SLM)

166 Advanced Financial Accounting Difficulties are listed as follows: 1. Bases of Segmentation A diversified company may be divided for segment reporting purposes in terms of organisation division, industry, market, customer product, etc. Each base of segmentation may create segments that differ significantly in profitability, growth and risk and each implies a different basis for identifying segments. Moreover, more than one form of diversification may be present in the same. Unless the base (or bases) selected actually represent the company and the way it operates, unless they reflect the difference within the company regarding rate of profit, degree of risk, and potential for growth, reports of operating data by segments are unlikely to be of any real use. 2. Allocation of Common Costs In a business enterprise producing more than one product or engaged in different activities, there are likely to be costs which are common to two or more of the products. Examples of common costs are general administrative and selling expenses, legal expenses, general advertising, etc. Because these costs are common to more than one segment, they cannot be associated in entirety with a single segment. The problem of allocating common costs is greater for some items than for others. It is particularly great for assets, liabilities, and equity so that reporting for business segments is suggested less often for information from the balance sheet, statement of shareholders equity, and funds statements than for information from the income statement. 3. Pricing Inter-segment Transactions A diversified company composed of disparate parts, each of which goes its own way, might have very few inter-company transactions. On the other hand, there might be some diversified business enterprises which may have very substantial transactions among and between the segments. CU IDOL SELF LEARNING MATERIAL (SLM)

Accounting and Auditing Issues 167 There are different methods for inter-segment transfers such as cost, cost plus, market price, and negotiated price. The basic purpose (in selecting a method of transfer pricing) is to motivate employees, and to actually measure the success of the several segments as accurately as possible. Different methods results in different operating results for the segments. For a meaningful segment reporting, there is a need for selecting a reasoned method for inter-segment transfers. 4. Costs of Segment Disclosure Further arguments against segmental reporting are concerned with the costs of disclosure. The provision of additional information will, undoubtedly, increase a firm’s operating costs in terms of the costs of collection, processing, audit and dissemination. Another important cost argument relates to the increased competition that may result from segmental disclosures. It is argued that the disclosure of profitable segments will attract competitors, whilst loss-making segments may become the subject of takeover bids or put pressure on management to sell them off, with the purpose of improving profits in the short term and to take on less risky projects. A competitive disadvantage may also occur where foreign companies are not required to provide segmental reports. 5. Management Conservatism Another argument is that, where there is no regulatory provision to disclose segmental reports, voluntary disclosures are likely to be perceived by managements to be beneficial only in certain instances; for example, where management believes that the company’s attractiveness to investors will be enhanced and the costs of finance reduced. Few companies are likely to take voluntary action that may benefit their competitors or reveal weaknesses. CU IDOL SELF LEARNING MATERIAL (SLM)

168 Advanced Financial Accounting 10.6 Segmental Disclosure The disclosure requirements of primary segments as follows: (a) Revenue from external customers (b) Revenue from transactions with other segments (c) Segment result (d) Cost to acquire tangible and intangible fixed assets (e) Depreciation and amortization expenses (f) Carrying amount of segment assets (g) Segment Liabilities (h) Non-cash expenses other than depreciation and amortization. (i) Reconciliation of revenue, result, assets and liabilities. Other Disclosures 1. In measuring and reporting segment revenue from transactions with other segments, inter- segment transfers should be measured on the basis that the enterprise actually used to price those transfers. The basis of pricing inter-segment transfers and any change therein should be disclosed in the financial statements. 2. Changes in accounting policies adopted for segment reporting that have a material effect on segment information should be disclosed. Such disclosure should include a description of the nature of the change, and the financial effect of the change if it is reasonably determinable. 3. AS 5 requires that changes in accounting policies adopted by the enterprise should be made only if required by statute, or for compliance with an accounting standard, or if it is considered that the change would result in a more appropriate presentation of events or transactions in the financial statements of the enterprise. CU IDOL SELF LEARNING MATERIAL (SLM)

Accounting and Auditing Issues 169 4. Changes in accounting policies adopted at the enterprise level that affect segment information are dealt with in accordance with AS 5. AS 5 requires that any change in an accounting policy which has a material effect should be disclosed. The impact of, and the adjustments resulting from, such change, if material, should be shown in the financial statements of the period in which such change is made, to reflect the effect of such change. Where the effect of such change is not ascertainable, wholly or in part, the fact should be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the current period but which is reasonably expected to have a material effect in later periods, the fact of such change should be appropriately disclosed in the period in which the change is adopted. 5. Some changes in accounting policies relate specifically to segment reporting. Examples include changes in identification of segments and changes in the basis for allocating revenues and expenses to segments. Such changes can have a significant impact on the segment information reported but will not change aggregate financial information reported for the enterprise. To enable users to understand the impact of such changes, this Standard requires the disclosure of the nature of the change and the financial effect of the change, if reasonably determinable. 6. An enterprise should indicate the types of products and services included in each reported business segment and indicate the composition of each reported geographical segment, both primary and secondary, if not otherwise disclosed in the financial statements. 10.7 Summary of the Unit Accounting Standards are employed as one of the main compulsory regulatory mechanisms for preparation of general-purpose financial reports and subsequent audit of the same, in almost all states of the globe. Accounting standards are concerned with the scheme of measurement and disclosure principles for the provision and demonstration of financial statements. CU IDOL SELF LEARNING MATERIAL (SLM)

170 Advanced Financial Accounting Accounting and Auditing Issues of the most significant new accounting and auditing standards and important projects. It does so by identifying the events of the past year that have developed into hot issues and reviewing the opportunities and pitfalls presented by these changes. Segment reporting is the reporting of the operating segments of a company in the disclosures accompanying its financial statements. Segment reporting is required for publicly-held entities, and is not required for privately held ones. Arguments against disclosure of information about segments of a diversified company generally emphasize practical difficulties. The opponents acknowledge the importance of segment reporting for investors. A diversified company may be divided for segment reporting purposes in terms of organisation division, industry, market, customer product, etc. In a business enterprise producing more than one product or engaged in different activities, there are likely to be costs which are common to two or more of the products. A diversified company composed of disparate parts, each of which goes its own way, might have very few inter-company transactions. Another argument is that, where there is no regulatory provision to disclose segmental reports, voluntary disclosures are likely to be perceived by managements to be beneficial only in certain instances 10.8 Key Words/Abbreviations z Pricing Inter-segment Transactions: The basic purpose (in selecting a method of transfer pricing) is to motivate employees. z Reconciliation of Revenue: Total revenue equals debits, credits and cash on hand. CU IDOL SELF LEARNING MATERIAL (SLM)

Accounting and Auditing Issues 171 10.9 Learning Activity 1. Discuss about the auditing and accounting issues. _________________________________________________________________ _________________________________________________________________ 2. Explain about the problems and difficulties in Segmental Reporting. _________________________________________________________________ _________________________________________________________________ 10.10 Unit End Questions (MCQs and Descriptive) A. Descriptive Type Questions 1. Discuss about the segmental disclosure. 2. What is Accounting Standards? B. Multiple Choice/Objective Type Questions 1. Report a segment if it has at least __________ of the revenues, profit or loss, combined assets of the entity. [a] 12% [b] 11% [c] 10% [d] 15% 2. Difficulties in segment reporting are __________. [a] Costs of Segment Disclosure [b] Management Conservatism [c] Both [a] and [b] [d] None CU IDOL SELF LEARNING MATERIAL (SLM)

172 Advanced Financial Accounting Answers 1. [c], 2. [c] 10.11 References 1. Arulanandam and Raman, Advanced Accountancy, Himalaya Publication House Pvt. Ltd., Edition 2018. 2. Dr. Vishwanathan Reddy and Jayaram Kanzal, Corporate Accounting, Himalaya Publication House Pvt. Ltd., Edition 2019. 3. Dr. S.N. Maheswari, Financial Accounting, Vikas Publication, Edition 2017. 4. S.P. Jain and K.L. Narang, Financial Accounting, Kalyani Publication, Edition 2018. 5. Reddy, K.R. (2000), “Accounting Standards and Gaps in Practices in India”, Management Accountant, ICWAI, April. 6. http://www.mca.gov.in/MinistryV2/accountingstandards1.html 7. https://www.icaew.com/technical/by-country/north-america/us/accounting-in-us/us-gaap 8. https://www.ifrs.org/issued-standards/list-of-standards/ 9. http://www.accountingnotes.net/final-accounts/final-accounts-of-the-companies-with- solutions-accounting 10. http://www.accountingnotes.net/amalgamation/external-reconstruction-and-amalgamation ˆˆˆ CU IDOL SELF LEARNING MATERIAL (SLM)

Joint Venture 173 UNIT 11 JOINT VENTURE Structure: 11.0 Learning Objectives 11.1 Introduction 11.2 Concept of Joint Venture 11.3 Objectives of Joint Venture 11.4 Difference between Joint Venture and Partnership 11.5 Accounting Treatment 11.6 Practical Problems on Joint Venture 11.7 Summary 11.8 Key Words/Abbreviations 11.9 LearningActivity 11.10 Unit End Questions (MCQs and Descriptive) 11.11 References 11.0 Learning Objectives After studying this chapter, you will be able to: z Learn the concept and objectives of Joint Venture z Learn the concept of Accounting Treatment z Discuss the difference between Joint Venture and Partnership CU IDOL SELF LEARNING MATERIAL (SLM)

174 Advanced Financial Accounting 11.1 Introduction Joint Venture is a restricted or a temporary partnership between two or more persons who undertake jointly to complete a particular adventure. In general, the joint venture is formed for the purpose of consigning the goods from one place to another, undertaking contracts for construction works, underwriting of shares or debentures of joint stock companies, etc. The persons who enter into this agreement are called co-venturers and this joint venture agreement will come to an end on the completion of the work for which it was formed. The profits or losses are shared between the co-ventures in their agreed ratio and in the absence of such agreement, the profits or losses are shared equally among themselves. As and when the venture is completed, the venture is closed by settling the co-venturers' accounts either by receipt of cash or by payment of cash. It is established for a specific purpose or to accomplish a certain task or activity and when this purpose is completed the joint venture comes to an end. Joint venture is not exactly same as partnership, which is also a type of business entity, that come into existence when two or more persons come together to share business profits. The partnership business is undertaken either by all the partners or by one partner acting on behalf of all the partners. 11.2 Concept of Joint Venture Joint Venture is defined as a business organization where two or more parties come together for completing a particular task, project or activity. The venture is formed for a limited period, also known by the name temporary partnership. Here, the parties to the venture are considered as Co-venturers who agree to run the venture jointly by combining their resources like capital, inventory, machinery, manpower, etc. and by sharing profits and losses in the specified ratio without the use of the firm name. 11.3 Objectives of Joint Venture 1. To enter foreign market and even new or emerging market. 2. To reduce the risk factor for heavy investment. 3. To make optimum utilization of resources. 4. To gain economies of scale. 5. To achieve synergy. CU IDOL SELF LEARNING MATERIAL (SLM)

Joint Venture 175 Features of Joint Venture 1. Agreement: Two or more firms come to an agreement, to undertake a business, for a definite purpose and are bound by it. 2. Joint Control: There exist a joint control of the co-venturers over business assets, operations, administration and even the venture. 3. Pooling of resources and expertise: Firms pool their resources like capital, manpower, technical know-how, and expertise, which helps in large-scale production. 4. Sharing of profit and loss: The co-venturers agree to share the profits and losses of the business in an agreed ratio. The computation of the profit and loss is usually done at the end of the venture, however, when it continues for the long duration, the profit and loss is calculated annually. 5. Access to advanced technology: By entering into joint venture firms get access to various techniques of production, marketing and doing business, which decreases the overall cost and also improves quality. 6. Dissolution: Once the term or purpose of the joint venture is complete, the agreement comes to an end, and the accounts of the co-venturers, are settled, as and when it is dissolved. 11.4 Difference between Joint Venture AND Partnership Joint Venture Partnership 1. Joint Venture is a business formed by 1. A business arrangement where two or more two or more than two persons for a persons agree to carry on business and have limited period and a specific purpose. mutual share in the profits and losses is known as Partnership. 2. There is no such specific act. 2. The partnership is governed by the Indian 3. Business carried on by Co-venturers. Partnership Act, 1932. 3. Business carried on by Partners. CU IDOL SELF LEARNING MATERIAL (SLM)

176 Advanced Financial Accounting 4. A minor cannot become a co-venturer. 4. A minor can become a partner to the benefits of the firms. 5. Basis of Accounting nature is Liquidation. 6. At the end of the venture or on interim 5. Basis of Accounting nature of Going Concern. 6. Ascertainment of profit is annually. basis as the case may be. 7. Not necessary to maintenance of 7. Mandatory to maintenance of separate set separate set of books. of books. 11.5 Accounting Treatment The joint venture accounts can be maintained in any one of the following methods: Method 1 Each co-venturer is maintaining a joint venture account and other co-venturers' account in his own books of accounts. Every co-venturer records all the transactions in his books in connection with the joint venture. Accounting entries: In the Books of X In the Books of Y When goods are supplied by X and expenses paid: Joint Venture A/c Dr. Joint Venture A/c Dr. To Purchase A/c To X’s A/c To Cash A/c When goods are supplied by Y and expenses paid: Joint Venture A/c Dr. Joint Venture A/c Dr. To Y’s A/c To Purchase A/c To Cash A/c CU IDOL SELF LEARNING MATERIAL (SLM)

Joint Venture 177 When goods are directly purchased for joint venture by the co-venturer, Cash/Bank is credited instead of purchases account. When a Bill is drawn by X and accepted by Y: Bills Receivable A/c Dr. X's A/c Dr. To Bills Payable A/c To Y’s A/c When the bill is discounted: Cash/Bank A/c Dr. Joint Venture A/c (Discount) Dr. Joint Venture A/c (Discount) Dr. To Bills Receivable A/c To X’s A/c When the goods are sold by X: Cash A/c Dr. X’s A/c Dr. To Joint Venture A/c To Joint Venture A/c When the goods are sold by Y: Y’s A/c Dr. Cash A/c Dr. To Joint Venture A/c To Joint Venture A/c When commission allowed to Y: Joint Venture A/c Dr. Joint Venture A/c Dr. To Commission A/c To Y’s A/c When unsold goods are taken by Y: Y ‘s A/c Dr. Purchase A/c Dr. To Joint Venture A/c To Joint Venture A/c When profit is transferred: Joint Venture A/c Dr. Joint Venture A/c Dr. To Profit and Loss A/c (for X’s Share) To Profit and Loss A/c (for Y’s Share) To Y’s A/c (for Y’s Share) To X’s A/c (for X’s Share) CU IDOL SELF LEARNING MATERIAL (SLM)

178 Advanced Financial Accounting 11.6 Practical Problems on Joint Venture Illustration - 1 Amit and Bipul entered into a joint venture in timber. Bipul is to be allowed a commission on sales at 10% and profits are to be shared in the ratio of Amit 2/3 and Bipul 1/3. Amit provides timber from stock for ` 10,000 and incurs expenses amounting to ` 1,000. Bipul pays ` 1,000 for unloading and other non recurring expenses. Amit drew upon B for ` 6,000. The draft was accepted and Amit got it discounted for ` 5,760. Bipul sold 90% of the timber for ` 15,000 and took over the remaining timber at cost plus 20%. Bipul settles his account by bank draft. Give the Journal Entries and the relevant accounts in the books of both the parties. Solution: Books of Amit Journal Particulars LF Amount Amount 10,000 Joint Venture A/c Dr. 11,000 1,000 To Purchase A/c 1,000 To Bank A/c 6,000 (Being goods sent to Bipul and expenses incurred for Joint Venture) Joint Venture A/c Dr. 1,000 To Bipul’s A/c (Being expenses incurred by Bipul) Bills Receivable A/c Dr. 6,000 To Bipul’s A/c (Being bill drawn accepted by Bipul) CU IDOL SELF LEARNING MATERIAL (SLM)

Joint Venture 179 Bank A/c Dr. 5,760 6,000 240 15,000 Joint Venture A/c (Discount) Dr. 15,000 1,500 To Bills Receivable A/c (Bill discounted) 1,500 1,440 1,440 Bipul’s A/c Dr. Dr. 2,700 1,800 To Joint Venture A/c 900 7,040 (Being sale proceeds on joint venture received by Bipul) 7,040 Joint Venture A/c Dr. Cr. Amount To Bipul’s A/c 15,000 (For commission) 1,440 Bipul’s A/c To Joint Venture A/c (Being unsold goods (timber) taken by Bipul at cost plus 20%) Joint Venture A/c Dr. To Profit and Loss A/c To Bipul’s A/c (Being profit transferred) Bank A/c Dr. To Bipul’s A/c (Being balance received from Bipul) Dr. Joint Venture Account Particulars Amount Particulars To Sundries: By Bipul’s A/c – Sales Goods 10,000 By Bipul’s A/c – Goods taken Expenses 1,000 CU IDOL SELF LEARNING MATERIAL (SLM)

180 Advanced Financial Accounting To Bipul’s A/c Expenses 1,000 To Bipul’s A/c (Commission) 1,500 To Discount A/c 240 To Profit and Loss A/c 1,800 To Bipul’s A/c (1/3) 900 2,700 16,440 16,440 Dr. Bipul’s Account Cr. Particulars Amount Particulars Amount To Joint Venture A/c – Sales 15,000 By Bills Receivable A/c 6,000 To Joint Venture A/c – Goods taken 1,440 By Joint Venture A/c – Expenses 1,000 By Joint Venture A/c – Commission 1,500 By Joint Venture A/c – Profit 900 By Bank A/c 7,040 16,440 16,440 Calculation of Timber taken by B 1/10th of Cost 1,000 1/10th of Amit’s Expenses 100 1/10th of Bipul’s Expenses 100 Add: 20% of ` 1,200 1,200 240 1,440 CU IDOL SELF LEARNING MATERIAL (SLM)

Joint Venture 181 In the Books of Bipul Journal Particulars LF Amount Amount Joint Venture A/c Dr. 11,000 To Amit’s A/c 11,000 (Being goods supplied by Amit and expenses incurred) Joint Venture A/c Dr. 1,000 To Cash A/c 1,000 (Being expenses incurred for Joint Venture) Amit’s A/c Dr. 6,000 To Bills Payable A/c 6,000 (Being bill accepted drawn by A) Joint Venture A/c Dr. 240 240 To Amit’s A/c (Being discount on bill discounted — borne by Amit charged to Joint Venture A/c) Cash A/c Dr. 15,000 To Joint Venture A/c 15,000 (Being goods sold and proceeds received) Joint Venture A/c Dr. 1,500 To Commission A/c 1,500 (Being 10% commission on ` 15,000 charged to Joint Venture A/c) Purchase A/c Dr. 1,440 To Joint Venture A/c 1,440 (Unsold goods taken) CU IDOL SELF LEARNING MATERIAL (SLM)

182 Advanced Financial Accounting Joint Venture A/c Dr. 2,700 To Profit and Loss A/c 900 To Amit’s A/c 1,800 (Being profit transferred) Amit’s A/c Dr. 7,040 To Bank A/c 7,040 (Being balance due to A settled by a bank draft) Dr. Joint Venture Account Cr. Particulars Amount Particulars Amount To Amit’s A/c – Goods 10,000 By Cash A/c – Sale Proceeds 15,000 1,000 By Purchase – Goods taken 1,440 To Expenses 1,000 To Sundries: 1,500 Expenses 240 Commission 2,700 To Amit’s A/c – Discount To Profit and Loss A/c (1/3) 900 To Amit’s A/c (2/3) 1,800 16,440 16,440 Amit’s Account Particulars Amount Particulars Amount To Bills Payable A/c 6,000 By Joint Venture A/c –Goods 10,000 To Bank A/c 7,040 By Joint Venture A/c – Expenses 1,000 By Joint Venture A/c – Discount 240 By Joint Venture A/c – Profit 1,800 13,040 13,040 CU IDOL SELF LEARNING MATERIAL (SLM)

Joint Venture 183 Illustration - 2 A and B, both contractors, undertook a Joint Venture involving the construction of a building. A Joint Bank Account was opened in which A deposited ` 75,000 and B deposited ` 37,500. The contract price was ` 3,75,000. The result of Joint Venture was to be shared as to A 2/3 and B 1/3. The details of the transactions were as follows: ` Wages paid 89,000 Materials supplied by A 13,500 Materials supplied by B 12,000 Materials purchased 1,65,000 Salaries 12,000 Cartage 18,500 Architect’s fee paid by A 10,000 Concrete Mixer plant purchased 38,500 The stock of materials on the completion of the contract, valued at ` 16,500, was taken over by A. Concrete Mixer plant was taken over by B for ` 30,000. A was to be paid ` 18,000 per annum against establishment expenses, to be charged to the Joint Venture Account. The contract lasted for 8 months. Prepare Joint Venture Account, Joint Bank Account and accounts of A and B. Solution: Particulars LF Amount Amount Dr. 1,12,500 Joint Bank A/c 75,000 To A’s A/c 37,500 To B’s A/c (Being amount contributed by A and B) CU IDOL SELF LEARNING MATERIAL (SLM)

184 Advanced Financial Accounting Joint Venture A/c Dr. 89,000 To Joint Bank A/c Dr. 89,000 (Being wages paid) Dr. Dr. 25,500 Joint Venture A/c Dr. To A’s A/c Dr. 13,500 To B’s A/c Dr. 12,000 Dr. (Being materials supplied by A and B) Dr. 1,65,000 Joint Venture A/c 1,65,000 To Joint Bank A/c 12,000 (Being materials purchased) 12,000 Joint Venture A/c To Joint Bank A/c 18,500 (Being salaries paid) 18,500 Joint Venture A/c 10,000 10,000 To Joint Bank A/c 38,500 (Cartage paid) 38,500 Joint Venture A/c To A’s A/c 3,75,000 (Being Architect’s fees paid by A) 3,75,000 Joint Venture A/c 16,500 To Joint Bank A/c 16,500 (Being Concrete Mixer plant purchased) Joint Bank A/c To Joint Venture A/c (Being contract price received) A’s A/c To Joint Venture A/c (Being unused materials taken over by A) CU IDOL SELF LEARNING MATERIAL (SLM)

Joint Venture 185 B A/c Dr. 30,000 To Joint Venture A/c 30,000 (Being Concrete Mixer plant taken over by B) Joint Venture A/c Dr. 12,000 To A A/c 12,000 (Being establishment expenses allowed for A for 8 months, i.e., 18,000 × 8/12) Dr. Joint Venture A/c Cr. Particulars Amount Particulars Amount To A’s A/c – Establishment 3,75,000 12,000 By Joint Bank – Contract price received To Joint Bank A/c – Wages 89,000 By A’s A/c – Unsold material 16,500 A’s A/c – Material 13,500 taken B’s A/c – Material 12,000 By B’s A/c – Concrete mixer 30,000 To Joint Bank A/c – Material 1,65,000 plant taken To Joint Bank A/c – Salaries 12,000 To Joint Bank A/c – Cartage 18,500 To A’s A/c – Architect fees 10,000 To Joint Bank A/c – Concrete Mixer 38,500 Profit – A (2/3 34,000 Profit – B (1/3 17,000 51,000 4,21,500 4,21,500 CU IDOL SELF LEARNING MATERIAL (SLM)

186 Advanced Financial Accounting Dr. A’s A/c Cr. Particulars Amount Particulars Amount To Joint Venture A/c – Materials 16,500 By Joint Bank A/c 75,000 taken 1,28,000 By Joint Venture A/c: 13,500 To Joint Bank A/c Material 10,000 Architect fees 12,000 Establishments 34,000 Profit 1,44,500 1,44,500 Dr. B’s A/c Cr. Particulars Amount Particulars Amount To Joint Venture A/c – Concrete 30,000 By Joint Bank A/c 37,500 Mixer plant taken 36,500 By Joint Venture A/c – Material 12,000 To Joint Bank A/c 66,500 By Joint Venture (Profit) 17,000 66,500 Dr. Joint Bank A/c Cr. Particulars Amount Particulars Amount To Joint Venture – Materials taken 16,500 By Joint Bank A/c 75,000 By Joint Venture A/c To A’s A/c 75,000 By Joint Wages A/c 89,000 By Joint Material A/c 1,65,000 To B’s A/c 37,500 To Joint Venture A/c – Contract 3,75,000 Price CU IDOL SELF LEARNING MATERIAL (SLM)

Joint Venture 187 By Joint Salary A/c 12,000 By Joint Cartage A/c 18,500 By Joint Concrete Mixer A/c 38,500 By A’s A/c 1,28,000 By B’s A/c 36,500 4,87,500 4,87,500 Illustration - 3 Deepa and Eswari entered into a joint venture to purchase stationeries and supply them to colleges. They agreed to share profits in the ratio of 5 : 3 and to maintain books of accounts for the joint venture under Memorandum Joint Venture Method. Deepa and Eswari purchased stationeries for ` 6,00,000 and ` 4,50,000 respectively and sold them for ` 7,50,000 and ` 5,25,000 respectively. Selling expenses incurred by them are ` 35,000 and ` 25,000 respectively. No goods remained unsold and the final amount is settled by cheque. Prepare necessary accounts in the books of Deepa. Solution: Memorandum Joint Venture Account Cr. Dr. ` Particulars ` Particulars To Purchases: 7,50,000 By Sales: 5,25,000 Deepa Eswari 6,00,000 Deepa To Selling Expenses: Deepa 4,50,000 Eswari Eswari 35,000 25,000 CU IDOL SELF LEARNING MATERIAL (SLM)

188 Advanced Financial Accounting To Profit on joint venture: Deepa ©§¨¨1,65,000 x 5 ·¹¸¸ 1,03,125 8 61,875 Eswari ©¨§¨1,65,000 x 3 ·¸¹¸ 8 12,75,000 12,75,000 In the books of Deepa Dr. Joint Venture with Eswari Cr. Particulars ` Particulars ` To Purchase A/c 6,00,000 By Bank A/c (Sales) 7,50,000 To Selling Expenses 35,000 To P&L A/c 1,03,125 To Bank A/c (Remitted to Eswari) 11,875 7,50,000 7,50,000 Illustration - 4 Rony sent goods to Gupta to be sold on Consignment basis at 5% commission. Goods costing ` 4,00,000 were sent and ` 40,000 expenses were incurred. Gupta had to incur ` 10,000 expenses for landing and 75% of the goods were sold out for ` 4,80,000. Gupta sent the amount due from him with the Account Sale, but wanted to return the balance of goods as he was not agreeable to carry on as commission agent. He was, however, persuaded to continue on Joint Venture basis for 1/3 Profit. ` 2,00,000 worth of goods was further despatched by Rony. All the goods (except ` 20,000 which were taken over by Gupta for the same amount) were sold out for ` 5,00,000. Rony incurred ` 20,000 expenses and expenses of Gupta amounted to ` 17,000. Show the necessary account in the books of both the parties. CU IDOL SELF LEARNING MATERIAL (SLM)

Joint Venture 189 Solution: In the Books of Rony Dr. Consignment Account Cr. Particulars Amount Particulars Amount To Goods Sent on Consignment A/c 4,00,000 By Gupta’s A/c – Sales 4,80,000 To Bank Expenses A/c 40,000 By Stock on Consignment A/c 1,12,500 To Gupta’s A/c – Lending Charges 10,000 To Gupta’s A/c – Commission 24,000 ¨§ 4,50,000 u 25 ¸· © 100 ¹ To Profit and Loss A/c – Profit 1,18,500 5,92,500 5,92,500 Dr. Goods Sent on Consignment Account Cr. Particulars Amount Particulars Amount To Purchase A/c 4,00,000 By Consignment A/c 4,00,000 4,00,000 4,00,000 Dr. Gupta Account Cr. Particulars Amount Particulars Amount To Consignment A/c – Sales 4,80,000 By Consignment A/c – Expenses 10,000 By Consignment A/c – 24,000 Commission 4,46,000 By Bank A/c 4,80,000 4,80,000 CU IDOL SELF LEARNING MATERIAL (SLM)

190 Advanced Financial Accounting On Conversion into Joint Venture Dr. Joint Venture Account Cr. Particulars Amount Particulars Amount By Gupta’s A/c – Sales 5,00,000 To Stock on Consignment – Goods lying with the consignee 1,12,500 20,000 2,00,000 By Gupta’s – Goods taken To Purchases A/c – Goods 20,000 To Bank A/c – Expenses 17,000 To Gupta’s A/c – Expenses 1,70,500 To Profit and Loss A/c 1,13,667 Gupta’s A/c 56,833 5,20,000 5,20,000 Dr. Gupta’s Account Cr. Particulars Amount Particulars Amount To Joint Venture A/c – Sales 5,00,000 By Joint Venture A/c – Expenses 17,000 To Joint Venture A/c – Goods taken 20,000 By Joint Venture A/c – Profit 56,833 By Bank 4,46,167 5,20,000 5,20,000 11.7 Summary Joint Venture is a restricted or a temporary partnership between two or more persons who undertake jointly to complete a particular adventure. In general, the joint venture is formed for the purpose of consigning the goods from one place to another, undertaking contracts for construction works, underwriting of shares or debentures of joint stock companies, etc. CU IDOL SELF LEARNING MATERIAL (SLM)

Joint Venture 191 The venture is formed for a limited period, also known by the name temporary partnership. Here the parties to the venture are considered as Co-venturers who agree to run the venture jointly by combining their resources like capital, inventory, machinery, manpower, etc. and by sharing profits and losses in the specified ratio without the use of the firm name. The goods supplied for joint venture and expenses incurred are debited to this account. No account is taken of goods supplied and expenses incurred by the other venturer. The account is also debited with one’s share of profit made on joint venture, the corresponding credit being given to his Profit and Loss Account. Each co-venturer is maintaining a joint venture account and other co-venturers' account in his own books of accounts. 11.8 Key Words/Abbreviations z Joint Venture: Joint Venture is a restricted or a temporary partnership between two or more persons z Partnership: The partnership is governed by the Indian Partnership Act, 1932. 11.9 Learning Activity 1. Explain the concept of Joint Venture. _________________________________________________________________ _________________________________________________________________ 2. Explain about the accounting treatment in joint venture. _________________________________________________________________ _________________________________________________________________ 3. Give the difference between Joint Venture and Partnership. _________________________________________________________________ _________________________________________________________________ CU IDOL SELF LEARNING MATERIAL (SLM)

192 Advanced Financial Accounting 11.10 Unit End Questions (MCQs and Descriptive) A. Descriptive Type Questions 1. What are the objectives of Joint Venture? 2. Explain the features of Joint Venture. 3. Veena and Meena entered into a joint venture sharing profits and losses in the ratio of 3 : 2. Veena contributed ` 60,000 and Meena ` 80,000. The amount contributed by them were deposited into a joint bank account. They bought goods for cash ` 1,00,000 and from Veena for ` 40,000. They paid of carriage ` 7,000, Rent ` 2,000, insurance ` 3,000 and other expenses ` 4,000. All the goods were sold for ` 1,80,000. Pass the necessary journal entries. Ans: Journal entries 4. Radha and Sowmya entered into a Joint Venture to buy and sell goods and share profits and losses equally. They opened a Joint Bank Account to which Radha contributed ` 55,000 and Sowmya contributed ` 50,000. Radha and Sowmya purchased goods for ` 1,05,000. Radha also supplied goods worth ` 7,500 and paid rent for the venture ` 1,500. They sold goods for ` 1,60,000. The expenses incurred on advertisement amounted to ` 4,000, which were paid by Sowmya and she took balance of stock for ` 3,000. Prepare Joint Venture Account in the books of Radha. Ans: Joint Venture Account Total: ` 1,63,000 CU IDOL SELF LEARNING MATERIAL (SLM)