CPA PEP Prep Q&A

IAS 28 Inv in Associates and Joint Ventures. Quiz.

 
Picture of Marina Morozova
IAS 28 Inv in Associates and Joint Ventures. Quiz.
by Marina Morozova Send a message - 27 Mar 2017, 11:32 PM
 

Hello,

Sunny Inc. is a joint venture formed on January 1, 2013 by Palm Ltd. and Voice Corp. Palm transferred land with a net carrying value of $750,000 and a fair value of $1,875,000 to Sunny in return for a 40% interest in Sunny and cash consideration of $375,000. Voice contributed cash of $187,500 and other assets with a fair value of $2,062,500 for a 60% interest in Sunny. Sunny borrowed $650,000 from a bank to finance the start-up operations. Which one of the following amounts represents the gain on transfer of land to Sunny that Palm should recognize at the time of the transfer?

The correct answer to the quiz is 150000=120000+30000. What is 30000?

My calculations:

Cash Paid by Voice  $187500

Financed by Sunny $187500

Voice portion of financing  60%  $112500

Sale proceeds  $187500+112500=$300000

Palm portion of financing 40% =   $75000

Cash received by Palm $375000

Carrying value of Land  300000/1875000*750000=120000

Immediate gain = 300000-120000=180000

Cash                375000

Inv in Sunny   675000

                 Land                                   750000

                 Gain from trans L            180000

                 unrealized Gain (conr acc) 120000

Where could I miss 30000? Anybody?

Thank you,

Picture of Marina Morozova
Re: IAS 28 Inv in Associates and Joint Ventures. Quiz.
by Marina Morozova Send a message - 4 Apr 2017, 5:25 PM
 

Hello,

The question has been fixed. The correct answer is $180,000 now.

Thank you,

Picture of Lawrence Tan
Re: IAS 28 Inv in Associates and Joint Ventures. Quiz.
by Lawrence Tan Send a message - 6 Apr 2017, 2:36 PM
 

Hi Marina,

Could you please explain how the sales proceed to Palm become 300,000 and how the carrying value becomes 120,000? Didn't Palm received 375,000 as cash consideration?

Also, could you also please explain how you get the Palms' Investment in Sunny to be 675,000?

I appreciate your help or anyone here as I am not getting the rationale how you got 180,000 as the amount representing the gain on transfer of land to Sunny that Palm should recognize at the time of the transfer?

Lawrence

Picture of Marina Morozova
Re: IAS 28 Inv in Associates and Joint Ventures. Quiz.
by Marina Morozova Send a message - 6 Apr 2017, 6:55 PM
 

Hello Lawrence,

Sorry, if I do not express my thoughts properly in English. I will try...

It is provided that Sunny got cash from the joint venture, but the joint venture received only 187500 from Palm and had to obtain financing in order to pay the rest of cash.  So, if Sunny got 375000, but Palm paid 187500, then technically another half was paid by the joint venture through financing. Also, remember, the financing is shared by both Sunny and Palm. In order to calculate Sunny's sale proceeds we need to know how much was the Palm's share of the joint venture financing.

187500*60%=112500

now add together 112500 and 187500 (cash paid by Palm to the joint venture). You got your 300000.

675000 you'll get as a net of your t/as. You do not need it for calculating $180000 (realized profit). I just show the t/a record in order to point out that I cannot find 30K that were shown in the previous solution. Now, the solution has been corrected: it was a typo and 30K can be ignored. It was simply removed from the corrected solution. It seems, that the solution that is provided in the quiz is much shorter and faster for calculations. Please review it, it maybe easier for you to remember. I just do calculations as I've got used to.

Regards,


Picture of Marina Morozova
Re: IAS 28 Inv in Associates and Joint Ventures. Quiz.
by Marina Morozova Send a message - 6 Apr 2017, 7:10 PM
 

Sorry mixed up company names! I did it for a while ago... Here is the same text with the proper names

Hello Lawrence,

Sorry, if I do not express my thoughts properly in English. I will try...

It is provided that Palm got cash from the joint venture Sunny, but the joint venture Sunny received only 187500 from Voice and had to obtain financing in order to pay the rest of cash.  So, if Palm got 375000, but Voice paid 187500, then technically another half was paid by the joint venture Sunny through financing. Also, remember, the financing is shared by both Voice and Palm. In order to calculate Palm's sale proceeds we need to know how much was the Voice's share of the joint venture financing.

187500*60%=112500

now add together 112500 and 187500 (cash paid by Voice to the joint venture Sunny). You got your 300000.

675000 you'll get as a net of your t/as. You do not need it for calculating $180000 (realized profit). I just show the t/a record in order to point out that I cannot find 30K that were shown in the previous solution. Now, the solution has been corrected: it was a typo and 30K can be ignored. It was simply removed from the corrected solution. It seems, that the solution that is provided in the quiz is much shorter and faster for calculations. Please review it, it maybe easier for you to remember. I just do calculations as I've got used to.

Regards,

Picture of Lawrence Tan
Re: IAS 28 Inv in Associates and Joint Ventures. Quiz.
by Lawrence Tan Send a message - 10 Apr 2017, 12:50 PM
 

Sorry Marina I still don't quite understand how you arrive at $675,000. Is this a plug number? Also, if the carrying value of the land is $120,000, why is this reported in your journal entry as unrealized gain? By the way what do you mean by "conr acc" and "t/as" or "t/a".

Lastly, if this has been corrected, how come the official answer when I took this quiz today still shows $150,000 as the correct answer? Could you please send me the corrected solution?

Thanks,

Lawrence

Picture of Marina Morozova
Re: IAS 28 Inv in Associates and Joint Ventures. Quiz.
by Marina Morozova Send a message - 10 Apr 2017, 8:46 PM
 

Hi Lawrence,

Below is the solution from the Quiz#5 at the end of the Financial review module. You are right, the 150000 is still shows as a correct answer within the quiz of IAS 28 section. Probably Mike can help with it.

 I mean:  t/a- transaction(s), "contr acc" -contra account. For more details, please referrer to the text book "Hilton & Herauf. Modern advanced accounting in Canada. edition 7. pages 502-509 for the accounting of contributions to the joint ventures.

Regards,

Marina

Sunny Inc. is a joint venture formed on January 1, 2013 by Palm Ltd. and Voice Corp. Palm transferred land with a net carrying value of $750,000 and a fair value of $1,875,000 to Sunny in return for a 40% interest in Sunny and cash consideration of $375,000. Voice contributed cash of $187,500 and other assets with a fair value of $2,062,500 for a 60% interest in Sunny. Sunny borrowed $650,000 from a bank to finance the start-up operations. Which one of the following amounts represents the gain on transfer of land to Sunny that Lenny should recognize at the time of the transfer?
Select one:
1. 0
2. 69000
3. 150000
4. 180000 Correct

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