A 60:40 joint operation was commenced between two participants. Andrews Limited contributed cash of $90 000, and Michaels Limited contributed a Building with a fair value of $60 000. Using the line-by-line method of accounting, Andrews Limited would record which of the following entries?
A) DR Building in JO $90 000 CR Cash $90 000
B) DR Cash in JO $90 000 CR Cash $90 000
C) DR Cash in JO $54 000 DR Building in JO $36 000
CR Cash $90 000
D) DR Investment in joint operation $90 000 CR Cash $90 000

Question

Quizplus · Accepted Answer

The line-by-line method of accounting requires each participant to record their contribution to the joint operation as a separate entry. In this case, Andrews Limited contributed cash of $90,000 while Michaels Limited contributed a building with a fair value of $60,000. The total contribution to the joint operation is therefore $150,000 (90,000 + 60,000). Andrews Limited's share of this contribution is 60%, which is $90,000 (60% x 150,000). Therefore, Andrews Limited would record a debit to Cash in JO for their cash contribution of $54,000 (60% x 90,000) and a debit to Building in JO for their share of the building contribution of $36,000 (60% x 60,000). The total of these two entries equals Andrews Limited's total contribution to the joint operation of $90,000. The correct journal entry is therefore:
DR Cash in JO $54,000
DR Building in JO $36,000
CR Cash $90,000

A 60:40 Joint Operation Was Commenced Between Two Participants