Ally Ltd and Cat Ltd have established the Ally Cat Joint Operation. Ally Ltd has a 60% interest in the joint operation and Cat Ltd has a 40% interest. Ally Ltd contributed an asset with a carrying amount of $180 000 and a fair value of $240 000 and Cat Ltd agreed to provide technical services to the joint operation over the first two years of operations. The fair value of the technical services was agreed to be $160 000 and the cost to provide the services was estimated at $130 000 at the inception of the joint operation.
As part of its initial contribution entry Cat Ltd will record a:
A) debit against the services receivable in JO account of $64 000.
B) debit against the plant in JO account of $72 000.
C) credit against the obligation to JO of $78 000.
D) credit against the gain on provision of services of $12 000.

Question

Quizplus · Accepted Answer

Cat Ltd's contribution to the joint operation is the provision of technical services. The fair value of these services is $160,000, however, it will only cost Cat Ltd $130,000 to provide these services. Therefore, Cat Ltd has an obligation to the joint operation of $30,000. Since Cat Ltd has a 40% interest in the joint operation, they will be responsible for 40% of this obligation or $12,000. As a result, Cat Ltd will credit the obligation to JO account for $78,000 (the total obligation of $30,000 + Cat Ltd's share of the obligation of $12,000) as part of their initial contribution entry.

Ally Ltd and Cat Ltd Have Established the Ally Cat