Joint Venture Assume that hypothetical Companies A and B enter into a joint venture, each with a 50 percent interest. The first column presents the assumed financial statement for the joint

Question

Joint Venture

Assume that hypothetical Companies A and B enter into a joint venture, each with a 50 percent interest. The first column presents the assumed financial statement for the joint venture in its first year. Columns 2 and 3 reflect the financial result for Company A under the two methods of accounting for its interest in the joint venture.

[latex]^a[/latex]The data (other than the subtotals) shown under the equity method are the same as if there had been no joint venture except for “Equity in joint venture income,” “Investment in joint venture,” and “Retained earnings.”

Accepted Answer

First, examine the income statement. Notice that net income is $320,000 using either the equity method or proportionate consolidation. But sales, cost of sales, and expenses are different because under the equity method the net effect of sales, cost of sales, and expenses is reflected in the $60,000 equity in joint venture income.
On the balance sheet, the line item investment in joint venture observed under the equity method is replaced by the proportionate share of each balance sheet account in the proportionate consolidation method. The single line item is replaced with a line-by-line consolidation. Because the venturer has a 50 percent interest in the joint venture, 50 percent of joint venture assets and liabilities are included in the proportionate balance sheet.
The analyst will observe differences in performance ratios based on the accounting method used for joint ventures.

		Company A Venturer
	Joint Venture	Equity Method $^a$	Proportionate Consolidation
Income Statement
Sales	$400,000	$1,000,000	$1,200,000
Equity in joint venture income		60,000
Cost of sales	200,000	500,000	600,000
Other expenses	$\underline{80,000}$	$\underline{240,000}$	$\underline{280,000}$
Net income	$120,000	$320,000	$320,000
Balance Sheet
Cash	$40,000	$400,000	$420,000
Inventory		$500,000	$500,000
Investment in joint venture		$450,000
Other assets	$\underline{1,160,000}$	$\underline{1,500,000}$	$\underline{2,080,000}$
	$1,200,000	$2,850,000	$3,000,000
Accounts payable		$200,000	$200,000
Long-term debt	300,000	1,650,000	1,800,000
Capital stock		600,000	600,000
Retained earnings		$\underline{400,000}$	$\underline{400,000}$
Venturers’ (Companies A and B) equity	$\underline{900,000}$
	$1,200,000	$2,850,000	$3,000,000

Question 15.7: Joint Venture Assume that hypothetical Companies A and B ent...

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