Accounting for Joint Ventures

Meaning of Joint Venture It is usually a temporary partnership without the use of a firm name. It is limited to carryout a particular business plan, in which the persons concerned agree to contribute capital and to share profit (or losses). The parties in a joint ventures are known as co- venturers. Their liability is limited to the venture concerned for which they agree to contribute capital and share profit or losses

Meaning of Joint Venture Examples of Joint ventures: >Purchase and sale of goods >Joint consignment of goods >Speculation in shares >Underwriting of shares and debentures >Construction of a building, etc

Characteristics of a Joint Venture It is a temporary partnership which comes to an end after the completion of a particular venture. It is for a specific venture, so it is a particular partnership. The partnership is without the use of a firm name. The main purpose it to make profit and to distribute it among all co- venturers. Loss, if any, will also be borne in agreed ratio or equally if no agreement regarding ratio has been made.

Difference between Joint Venture and Consignment Relation between Parties: JV- Is that of owners. C- Is that of principle and agent. Methods of maintaining Accounts: JV- Four methods of keeping accounts. C-Only one method of keeping accounts Continuity of Relationship: JV- Is terminated as soon as the venture is over. C- Will be there even after one transaction. Ownership of Goods: JV- Is that of the co- venturers. C-Remains with the consignor though possession of goods passes from the consignor to the consignee.

Difference between Joint Venture and Consignment Profit earned: JV- Belongs to the co- venturers. C- Belongs to the consignor and not the consignee. Account Sales: JV-Is not sent by one co- venturer to another. C- Is sent by the consignor to consignee. Management: JV-Co- venturers enjoy full powers to manage the business C- The consignee being an agent has no powers except he has to obey the instruction of the consignor.

Difference between Joint Venture and Consignment Finance: JV- Money is contributed by all the co- venturers in certain proportion. C-All money is invested by the consignor. Risk: JV- Risk is shared between co- venturers. C- Sales are made at consignor’s risk. Scope: JV- Wide as it covers many activities besides trade. C- Limited only for trade.

Distinction between Joint Venture & Partnership Name of the firm: JV- It is carried on without a firms name. P- Carried on with a firm name. Co-Venturers/Partners: JV- Parties are called co-venturers. P- Parties are called partners. Continuity: JV- Comes to an end after completion of a particular venture. P- Continuous Liability: JV- Limited to the venture concerned.

Distinction between Joint Venture & Partnership Liability: P-Unlimited to the extent of business and private estate. Location of Business: JV- Generally Local. P-May be located at different places. Position of a Minor: JV-Minor is generally not admitted. P-Minor can be admitted for benefits only. Application of the Act: JV- No enactment is applicable.

Distinction between Joint Venture & Partnership Application of Act: P- Indian Partnership Act, 1932 is applicable. No of Members: JV- Number of members can be unlimited. P- Limited to 20 in ordinary trade and 10 in banking business.

Methods of Recording Joint Venture Transactions Following are the methods of recording in a Joint Venture: i) When one of the co-venturer is appointed to manage the joint venture. ii) When separate sets of books is not maintained. iii) When separate set of books is maintained. iv) When a joint venture transaction is recorded through the Memorandum Joint Venture Account.

A) When one co-venturer is appointed to manage the joint venture Question 1> Ram, Mohan and Rahim were partners in a joint venture, each contributing Rs.5000. Ram purchased goods for Rs.13000 and also supplied goods worth Rs.1000 from his stock. Rahim also supplied goods worth Rs.1500 from stock and his expenses in connection with the supplying of goods on account of joint venture amounted to Rs.50. Ram paid Rs.250 for expenses in connection with the joint venture. Ram sold goods on behalf of the joint venture and realised Rs.20800. Ram was entitled to a commission of 5 percent on sales. Unsold goods amounting to Rs.500 were taken over by Mohan. Ram settled accounts of Mohan and Rahim by bank drafts. Prepare Joint venture, Mohan’s & Rahim’s accounts in Ram’s books.

Solution: Joint Venture account 21,300 Particulars To Bank a/c (Purchases) To Goods a/c (Goods Supplied) To Rahim (Goods & Expenses) To Bank a/c (Exps) To Commission a/c (5%) To Profit on Joint Venture Rs. P/l a/c 1,486 Mohan 1,487 Rahim 1,487 Amt (Rs) 13,000 1,000 1,550 250 1,040 4,460 By Bank a/c (Sales) By Mohan (unsold goods taken) 20,800 500 21,300

Mohan’s account Rahim’s account Particulars To Joint Venture a/c To Bank a/c Amt(Rs) 500 5,987 By Bank a/c By Joint Venture A/c (Profit) 5,000 1,487 6,487 Rahim’s account Particulars To Bank a/c Amt(Rs) 8,037 By Bank a/c By Joint Venture a/c By Joint Venture a/c (Profit) 5,000 1,550 1,487

B) When separate sets of books is not maintained Under this method, each co- venturer opens a joint venture account and personal accounts of the other co- venturers. Problem> A and B enter into a joint venture to take a building contract for Rs.24,00,000.They provide the following information regarding the expenses incurred by them: A B Materials 6,80,000 5,00,000 Cement 1,30,000 1,70,000 Wages --- 2,70,000 Architect’s Fee 1,00,000 --- Licence Fees --- 50,000 Plant --- 2,00,000

Plant was valued at Rs.1,00,000 at the end of the contract and B agreed to take it at that value. Contract amount of Rs.24,00,000 was received by Ram. Profit and losses are shared equally. You are asked to show: i) Joint Venture and B’s a/c in the books of A. ii) Joint Venture and A’s a/c in the books of B assuming that the balance due has been settled between the venturers.

In the books of A Joint Venture a/c Solution: In the books of A Joint Venture a/c Particulars To Bank a/c: Material 6,80,000 Cement 1,30,000 Architect’s Fee 1,00,000 To B’s a/c: Material 5,00,000 Wages 2,70,000 Cement 1,70,000 L .Fees 50,000 Plant 2,00,000 To Net Profit: B’s a/c 2,00,000 P/l A/c 2,00,000 Amt(Rs) 9,10,000 11,90,000 4,00,000 By Bank a/c By B’s a/c (Plant) 24,00,000 1,00,000 25,00,000

In the books of A B’s a/c Particulars To Joint Venture a/c (Plant) To Bank a/c Amt(Rs) 1,00,000 12,90,000 By Joint Venture a/c (Sundries) By Joint Venture a/c (Profit) 11,90,000 2,00,000 13,90,000

In the books of B Joint Venture a/c Particulars To Bank a/c: Material 6,80,000 Cement 1,30,000 Architect’s Fee 1,00,000 To B’s a/c: Material 5,00,000 Wages 2,70,000 Cement 1,70,000 L .Fees 50,000 Plant 2,00,000 To Net Profit: B’s a/c 2,00,000 P/l A/c 2,00,000 Amt(Rs) 9,10,000 11,90,000 4,00,000 By Bank a/c By B’s a/c (Plant) 24,00,000 1,00,000 25,00,000

In the books of B A’s a/c Particulars To Joint Venture a/c (Contract Amount) Amt(Rs) 24,00,000 By Joint Venture a/c (Sundries) By Joint Venture a/c (Profit) By Bank a/c 9,10,000 2,00,000 12,90,000

C) When separate set of books is maintained In this method, no individual co-venturer makes a record in his individual books but a complete set of double entry books is used for writing up joint venture transactions. The accounting treatment in this method is similar to that of partnership transactions. This method is usually followed when the co-venturers are at the same place and when the joint venture undertaken is sufficiently large.

Problem: A and B undertake jointly to construct a building for a contract price of Rs.25,00,000 payable as to Rs.20,00,000 by instalments in cash and Rs.5,00,000 in the fully paid shares of the company. A bank account is opened in their joint names, A paying Rs.6,25,000 and B Rs.3,75,000. they share profit or loss in 2:1 ratio respectively. Their transactions are: Rs. Wages paid 7,50,000 Bought Materials 15,00,000 Materials supplied by A 1,00,000 Materials supplied by B 49,500 Architect’s fees paid by A 50,000

The contract was completed and the price duly received The contract was completed and the price duly received. The joint venture was closed by A taking up all the shares of the company at an agreed valuation of Rs.4,25,000 and B taking up stock of materials at an agreed valuation of Rs.42,500. Prepare necessary accounts.

Solution: Joint Venture Account Particulars To Joint bank a/c: Materials 15,00,000 Wages 7,50,000 To A: 1,00,000 Architect’s fees 50,000 To B (Materials) To Shares a/c-loss To profit A 12,000 B 6,000 Amt(Rs) 22,50,000 1,50,000 49,500 75,000 18,000 By Joint Bank a/c By Shares a/c By B (Materials taken over) 20,00,000 5,00,000 42,500 25,42,500

Joint Bank Account Share’s account Particulars To A To B To Joint Venture a/c Amt(Rs) 6,25,000 3,75,000 20,00,000 By Joint Venture a/c By A By B 22,50,000 3,62,000 3,88,000 30,00,000 Share’s account Particulars To Joint Venture a/c Amt(Rs) 5,00,000 By A’s a/c By Joint Venture a/c 4,25,000 75,000

Co- Venturer’s account Particular To Shares To Joint Venture a/c To Joint Bank a/c A(Rs) 4,25,000 --- 3,62,000 B(Rs) 42,500 3,88,000 By Joint Bank a/c By Joint Venture a/c By joint Venture a/c 6,25,000 1,50,000 12,000 3,75,000 49,500 6,000 7,87,000 4,30,500

D) Memorandum Joint Venture Account Method This method is followed when each co- venturer in a joint venture wants to make a record of joint venture transactions in his books. This method is an alternative of (B) method and operates as follows: i> Every co- venturer will open a personal account called Joint Venture with-(name of the other co- venturer) Account. ii> In addition to the personal accounts, a Memorandum Joint Venture account is also opened to ascertain profit or loss. iii>The balance in Joint Venture with-… account will show the amount due to or due from the other co- venturer.

Problem: A and b entered into a joint venture of underwriting the subscription at par of 50,000 shares of Rs.10 each of a joint stock company. Their profit sharing ratio being 3:2 respectively. The consideration for guaranteeing the subscription was 500 other shares of the Rs.10 each fully paid to be issued by them. the public took up 48,000 shares and remaining shares of the guaranteed issue were taken by A and B who provide cash equally. The entire shareholding of the venture was then sold through other brokers, 60% at a price of Rs.9.50 less brokerage 50 paise per share, 20% at Rs.9.75 less brokerage 50 paise per share and the balance was taken over by A and

Memorandum Joint Venture Account B equally at Rs.9 per share. The share proceed were collected by A. Show Memorandum Joint Venture and Joint Venture with B in the books of A and Joint venture with A in the books of B assuming the final settlement of accounts was made between A and B. Memorandum Joint Venture Account Particulars To A (Purchase) To B (Purchase) To Profit: A:3/5 = 1,575 B:2/5 =1,050 Amt(Rs) 10,000 2,625 By A (Sale) 1500@Rs9=13,500 500@Rs9.25=4,625 WN(1) By A (Shares taken)(1) By B (Shares taken)(1) 18,125 2,250 22,625

Joint Venture with B Joint Venture with A Particulars To Bank a/c To P/ L a/c Amt(Rs) 10,000 1,575 8,800 By Bank a/c (Sales) By Shares a/c 18,125 2,250 20,375 Joint Venture with A Particulars To Bank a/c To P/ L a/c Amt(Rs) 10,000 1,050 By Bank a/c (Sales) By Shares a/c 2,250 8,800 11,050 Working Notes: Total no of shares to be sold are as follows: Total no of shares underwritten 50,000 (-)No. of shares subscribed by the public 48,000 No of shares purchased on account of joint venture = 2000 (+)Number of shares received as commission 500 = 2500

Interest Problem> V and W entered into a joint venture for purchase and sale of cotton. Their profit ratio being 2:1 and are also entitled to an interest of 12%/annum(on monthly basis) on money received as well as invested. Following transactions took place: On 1.1.2010, V purchased 1000 bales of cotton@Rs500/bale, brokerage being Rs10/bale On 28.2.2010, W purchased 500 bales of cotton@Rs520/bale, brokerage being Rs10/bale 0n 28.2.2010,V sold 800 bales@Rs672/bale, brokerage being Rs12/bale and took proceeds to himself. 0n 1.4.2010,W sold 600 bales@Rs580/bale, brokerage being Rs10/bale and took proceeds to himself.

It was also agreed that each co- venturer will at first sell from his own purchases and then, if need be, from the goods purchased by the other co-venturer . The balance stock left unsold was taken by V at cost on 30.4.2010 when the accounts were settled between the coventurers. You are required to show the accounts as would appear when maintained in a separate set of books.

Solution: Joint Venture account Particulars 2010 J-1 To V (Purchases+ Brokerage) F-1 To W A-30 To V (20,400- 8,960) A-30 To W (7,950-3,420) A -30 To Profit: V 33,353 W 16,677 Amt(Rs) 5,10,000 2,65,000 11,440 4,530 50,030 F-28 By V (sales- A-1 By W (Sales- A-30 By V (stock taken) 4,48,000 3,42,000 51,000 8,41,000

V’s account W’s account Particulars 2010 F-28 To Joint Venture-Sales A-30 To Joint Venture A-30 To Joint Bank Amt(Rs) 4,48000 51,000 55,793 J-1 By Joint Venture-Purchase A-30 By Joint Venture-Interest Venture a/c-Profit 5,10,000 11,440 33,353 5,54,793 W’s account Particulars 2010 A-1 To Joint Venture-Sales Amt(Rs) 3,24,000 F-1 By Joint Venture-Purchase A-30 By Joint Venture-Interest -Profit A-30 By Joint Bank 2,65,000 4,530 16,677 55,793

Joint Bank Account Particulars 2010 A-30 To W Amt(Rs) 55,793 A-30 By V

Conversion Of Consignment Into Joint Version Problem> On 1.4.2010 R consigned 100 table fans to S of Panipat, each costing Rs200.They were invoiced at Rs250 each. Freight and insurance charger paid by R amounted to Rs500. 5 table fans were damage in transit and on 30.6.2010 R received Rs500 on account of damaged fan from the insurance company. S took the delivery and accepted the a bill for Rs10,000 for 3 months. R got it discounted at 12%/annum. On 30.6.2010, S sent an account sales showing: 85 table fans @Rs260 were sold Damaged fans sold @Rs130/fan

He had incurred the following expenses: Rs. Octroi and carriage inwards 200 Godown expenses 200 Selling Expenses 500 S is entitled to a commission of Rs.20 per table fan sold plus 1/5th of the amount by which the gross sales proceeds exceeds a sum calculated at the invoice price. The commission is not payable on the sale of damaged fans. S remitted the balance due from him. After the preparations of the accounts it was decided that the relationship between R and S should be one of joint venture, the cost of table fan being taken at Rs220. under new agreement S is entitled to commission of 5%on all sales and R is entitled to interest @12%p.a on his capital outlay. R’s accounting year ends on 30.6.2010

Consignment To Panipat account Particulars 2010 A-1 To goods sent on consignment a/c A-1 To Cash (freight & insurance) J-30 To S (Expense) J-30 To S (Comm.) (1700+170) J-30 To Stock Reserve (10 fans @50 each) J-30 To Profit on consignment transferred to P/l a/c Amt(Rs) 25,000 500 1,870 2,050 J-30, 2010 By Bank (Insurance claim) By S (Sales) By S (Sale of damaged fans) By consignment stock a/c: Invoice price of 10fans@Rs250 each 2500 Add: Proportionate (freight& Insurance) 50 (octroi & Cartage) 20 Bt goods sent on consignment-loading 22,100 650 2,570 5000 30,820

Goods Sent On Consignment Account Particulars J-30 2010 To consignment to Panipat a/c To Trading a/c Amt(Rs) 5,000 20,000 2010 April By consignment to Panipat a/c 25,000 S’s Account Particulars June 30 2010 To Consignment to Panipat a/c( sale of 85 fans) To Consignment to Panipat a/c (sale of damaged fans) Amt(Rs) 22,100 650 2010 A-1 By Bills Receivable a/c June 30 By Consignment to Panipat a/c (Exps) By Consignment to Panipat a/c-Comm. By Bank a/c 10,000 900 1,870 9,980 22,750

Memorandum Joint Venture Acccount Particulars To Goods(100 fans@Rs220) To Expenses (R) To Discount To Expenses (S) To commission (S-5% on 22,100+650) To Interest to R (12,800x12%x 3/12) To Stock Reserve To Profit on Venture: R 49 S 49 Amt(Rs) 22,000 500 300 900 1,138 384 200 98 By sales(85 fans@ Rs260) By sales (Damaged fans) By Insurance Claim By Consignment Stock a/c Cost 2200 Proportionate Freight & Insurance 50 Octroi & Cartage 20 22,100 650 2,270 25,520

Thank you