Jensen Ltd and Harris Ltd have established the JH Joint Operation. Jensen Ltd has a 75% interest in the joint operation and Harris Ltd has a 25% interest. Jensen Ltd contributed an asset with a carrying amount of $130 000 and a fair value of $150 000 and Harris 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 $50 000 and the cost to provide the services was estimated at $45 000 at the inception of the joint operation. As part of its initial contribution entry Jensen Ltd will record a:
A) DR Services receivable in JO $50 000.
B) DR Plant in JO $97 500.
C) CR Gain on sale of plant $15 000.
D) CR Plant $150 000.

Question

Quizplus · Accepted Answer

Jensen Ltd contributed an asset with a carrying amount of $130 000 and a fair value of $150 000, which means there is a gain of $20 000 on contribution. Since Jensen Ltd has a 75% interest in the joint operation, the gain should be allocated to the joint operation in proportion to the ownership interest, which is $15 000 (75% of $20 000). Therefore, Jensen Ltd should record a DR Plant in JO $97 500 ($130 000 - $15 000) and a CR Gain on sale of plant $15 000. The technical services provided by Harris Ltd are not recorded as an asset but are recognized as an expense in the income statement over the two-year period.

Jensen Ltd and Harris Ltd Have Established the JH Joint