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A Ltd and B Ltd have established the AB Joint Operation. A Ltd has a 60% interest in the joint operation and B Ltd has a 40% interest.

A Ltd contributed an asset with a carrying amount of $90,000 and a fair value of $120,000 and B 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 $80,000 and the cost to provide the services was estimated at $65,000 at the inception of the joint operation.

-As part of its initial contribution entry B Ltd will record a:
A) Debit against the Services Receivable in JO account of $32,000;
B) Debit against the Plant in JO account of $36,000;
C) Credit against the Obligation to JO of $39,000;
D) Credit against the Gain on Provision of Services of $6,000.

Question

The following information relates to Questions
A Ltd and B Ltd have established the AB Joint Operation.  A Ltd has a 60% interest in the joint operation and B Ltd has a 40% interest.

A Ltd contributed an asset with a carrying amount of $90,000 and a fair value of $120,000 and B 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 $80,000 and the cost to provide the services was estimated at $65,000 at the inception of the joint operation.

-As part of its initial contribution entry B Ltd will record a:
A) Debit against the Services Receivable in JO account of $32,000;
B) Debit against the Plant in JO account of $36,000;
C) Credit against the Obligation to JO of $39,000;
D) Credit against the Gain on Provision of Services of $6,000.

Quizplus · Accepted Answer

B Ltd will record a credit against the Obligation to JO of $39,000 as part of its initial contribution entry. This is because the fair value of the technical services ($80,000) exceeds the cost to provide the services ($65,000), resulting in a gain of $15,000. B Ltd's 40% share of this gain is $6,000, which reduces the obligation to the joint operation to $39,000 ($80,000 - $6,000).

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