Assignment: ADVANCED ACCOUNTING CASE
JOINT ARRANGEMENT
During 2013, a group of academics were undertaking a bonding exercise in the Portadown Hills. While tracking through the hills, they came across a spring a pure sweet water. They formed a company called Arnside Ltd and decided to establish the extent of their find. In the process they expended funds, obtained from teaching overseas students, on equipment and employing geologists and mining experts. The general conclusion was that the find was significant and a commercially profitable business selling mineral water was feasible. As they were academics, and had little practical experience of business, they decided to establish a joint operation with Tower Ltd who would establish a factory to produce bottled water. The joint operation agreement was signed on January 2014, with Arnside Ltd and Tower Ltd having a 50% share in the unincorporated joint operation.
The initial contributions by the two operators were as follows :
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Arnside Ltd :
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Capitalised expenses
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$ 800.000
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Equipment
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$ 800.000
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Cash
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$ 2.400.000
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Tower Ltd :
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Cash
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$ 4.000.000
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The capitalised expenses were recorded in the books of Arnside Ltd at $320,000, while the equipment was recorded at a carrying amount of $640,000. In order to supply the cash, Arnside Ltd borrowed $800,000 of its required contribution. It is expected that the reserves of water will be depleted within 10 years, and the equipment is expected to have a similar useful life.
On 1 June 2014, the joint operation was ready to start producing bottles of water. The joint operation's accounts at 30 June 2015 contained the following information:
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Statement of Financial Position (extract)
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2014
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2015
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Work in progress
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$ 200.000
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Capitalised costs
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$ 800.000
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$ 800.000
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Plant and equipment
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$ 8.360.000
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$ 7.760.000
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Cash
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$ 80.000
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$ 240.000
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Account payable - plant
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$ (240.000)
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$ (800.000)
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Accrued expenses - wages etc
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$ (160.000)
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$ (200.000)
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Cash Receipts and Payments (extract)
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2015
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Payment
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Receipts
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Materials and supplies
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$ 480.000
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Administration
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$ 160.000
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Wages
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$ 560.000
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Account payable - plant
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$ 960.000
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Contributions from joint operators
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$ 2.000.000
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The output of the first year's operations was distributed equally to the joint operators. Production in the first year was estimated to be 15% of the reserves. At 30 June 2015, Arnside Ltd held 10% of its shares of output in inventory, having sold the rest to its customers for $2,000,000. Expenses of the joint operation incurred up to 30 June 2015 were allocated to the operators.
At 30 June 2015, the joint operation had ordered new plant and equipment of $300,000 that had not yet arrived. Because of some damage to the environment caused by the establishment of the pumping station to extract the water, there is a potential restoration cost to be incurred at closure of the joint operation. Whether this will be required will depend on the result of current legal inquiries.
Required :
Prepare the journal entries in the records of Arnside Ltd for the periods ending 30 June 2014 and 2015.