Journal Entry for Joint Venture
A joint venture is an agreement between two or more enterprises to cooperate on ventures, both parties have joint control and the right to the arrangement of net assets. Joint ventures can be formed for a variety of purposes, including developing new products, expanding into new markets, or exploiting natural resources.
Joint ventures offer a number of advantages, including access to new markets and technologies, increased capital, and the ability to share risk. They can also be an effective way to overcome the limitations of a single company.
However, joint ventures also have a number of potential disadvantages. These include the risk of disagreements between the partners, the need to coordinate operations, and the potential for duplication of efforts.
It is important to carefully consider the pros and cons of a joint venture before entering into an agreement. By doing so, you can ensure that the venture is successful for all involved.
Journal Entry for Joint Venture
When the company starts a new joint venture with the partner, the company has to record investment. The investment in the joint venture is the assets which record on the balance sheet. The company that has control over the joint venture must record it using the equity method.
The initial recognition of joint venture would be debiting joint venture account and crediting the cash transfer out. The journal entry is debiting joint venture investment and credit cash.
| Account | Debit | Credit |
|---|---|---|
| Joint Venture | $$$ | |
| Cash | $$$ |
The transaction will reduce the cash balance from company account. it also records the investment in joint venture.
Subsequently, the investment in the joint venture has to be measured by its performance. The profit of joint ventures will increase the investment on balance sheet. It increases based on the percentage of ownership.
The journal entry is debiting investment in joint venture and credit profit from the investment.
| Account | Debit | Credit |
|---|---|---|
| Joint Venture | $$$ | |
| Profit from joint venture | $$$ |
The transaction will increase the investment amount on balance sheet. And it also allows the company to record returns from the joint venture in the income statement.
On the other hand, if the joint venture is making a loss, it will decrease the amount of investment in joint venture. Similarly, the amount of loss will depend on the portion of ownership. The journal entry is debiting loss from joint venture and credit investment in joint venture.
| Account | Debit | Credit |
|---|---|---|
| Loss from joint venture | $$$ | |
| Joint Venture | $$$ |
When the company decides to sell the investment, they have to remove it from the balance sheet. They may be able to generate gain or loss depending on the comparison between sale proceed and carry amounts.
Example
Company ABC has established a joint venture with a company from overseas. ABC owns 50% of the joint venture. Here are the transaction related to the joint venture:
- On 01 Jan 202X, ABC invested $ 5 million into the joint venture.
- On 31 Dec 202X, Joint venture loss $ 500,000.
- On 31 Dec 202X+1, Joint venture make a profit of $ 800,000
- On 30 Apr 202X+1, ABC decides to sell all the investment to its partner for $ 7 million
ABC has joined with the partner to establish the joint venture. ABC has to record the investment in joint venture under the equity method.
- On 01 Jan 202X, ABC has invested $ 5 million in cash into the venture. They have to make journal entry by debiting investment in joint venture $ 5 million and credit cash at bank $ 5 million.
| Account | Debit | Credit |
|---|---|---|
| Joint Venture | 5,000,000 | |
| Cash | 5,000,000 |
- On 31 Dec 202X, the venture loss $ 500,000. ABC has to reduce the investment and record loss on income statement. As the company owns only 50%, so the loss is only 50% as well. The journal entry is debiting loss from joint venture $ 250,000 and credit joint venture $ 250,000.
| Account | Debit | Credit |
|---|---|---|
| Loss from joint venture | 250,000 | |
| Joint Venture | 250,000 |
- On 31 Dec 202X+2, the venture make profit of $ 800,000. Similar to lose, ABC has to take into account the profit based on the percentage of ownership. The journal entry is debiting joint venture $ 400,000 and credit profit from joint venture $ 400,000.
| Account | Debit | Credit |
|---|---|---|
| Joint Venture | 400,000 | |
| Profit from Joint Venture | 400,000 |
- On 30 April, ABC decide to sell all the ownership in the joint venture to the partner for $ 7 million. There may be gain or loss for the sale proceed, so we have to calculate the carrying amount and compare it with the sale amount.
Carry amount = $ 5,000,000 – 250,000 + 400,000 = $ 5,150,000
Gain from sale of joint venture = $ 7,000,000 – $ 5,150,000 = $ 1,850,000
The journal entry is debiting cash $ 7,000,000 and credit joint venture $ 5,150,000, gain from sale joint venture $ 1,850,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 7,000,000 | |
| Joint Venture | 5,150,000 | |
| Gain from Sale of Joint Venture | 1,850,000 |
