Question

In July 20X8, Tea Ltd entered into a joint operation with Milk Ltd to explore for minerals. Tea Ltd contributed $5 000 000 in cash and Milk Ltd contributed equipment with an agreed fair value of $5 000 000. The joint operation agreement states that Tea Ltd and Milk Ltd will share output, contributions and cost in the ratio of 50:50, and that Tea Ltd and Milk Ltd hold the joint operation assets as tenants in common. The estimated useful life of the Equipment was five years. In the accounts of Milk Ltd, this equipment was carried at cost $6 000 000 less accumulated depreciation $3 000 000.

The journal entry to record the initial investment of Tea Ltd would be:

		None of the others.
		Debit Interest in Joint Operation $2 500 000, Debit Plant and Equipment $2 500 000 and Credit Cash $5 000 000.
		Debit Cash $2 500 000, Debit Plant and Equipment $2 500 000 and Credit Cash $5 000 000.

Answer 1

Since Tea Ltd and Milk Ltd both have joint operation and have 50:50 ratio for contribution and cost, therefore, Recording of initial Investment of Tea Ltd would be as follows: Interest in Joint Venture 25,00,000 Plant and equipment 25,00,000 Cash (To record initial investment by Tea Ltd) 50,00,000 Option b is correct.