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Difficulty: MediumJoint Venture Accounting: No Separate Books (Memorandum Method)

Kalu and Sule entered into a joint venture to deal in goods, sharing profits and losses in the ratio 3:23:2 respectively, using the Memorandum Joint Venture method. Kalu supplied goods worth N60,000\text{N}60,000 and paid expenses of N4,000\text{N}4,000. Sule supplied goods costing N40,000\text{N}40,000 and paid expenses of N6,000\text{N}6,000. Sule sold all the venture goods for N150,000\text{N}150,000 and is entitled to a 5%5\% commission on total sales. What is the final cash settlement amount payable by Sule to Kalu upon closing the venture?

  1. N83,500\text{N}83,500Answer
  2. B
    N88,000\text{N}88,000
  3. C
    N77,000\text{N}77,000
  4. D
    N75,500\text{N}75,500

Answer

N83,500\text{N}83,500
Under the Memorandum Joint Venture method, net venture profit is found by deducting total costs (N60,000+N40,000=N100,000\text{N}60,000 + \text{N}40,000 = \text{N}100,000), total expenses (N4,000+N6,000=N10,000\text{N}4,000 + \text{N}6,000 = \text{N}10,000), and sales commission (5%×N150,000=N7,5005\% \times \text{N}150,000 = \text{N}7,500) from total revenue (N150,000\text{N}150,000), giving a profit of N32,500\text{N}32,500. Kalu's 3/53/5 profit share is N19,500\text{N}19,500. The amount due to Kalu from Sule (who holds the proceeds) is Kalu's cost (N60,000\text{N}60,000) plus Kalu's expenses (N4,000\text{N}4,000) plus Kalu's profit share (N19,500\text{N}19,500), totaling N83,500\text{N}83,500.

Step-by-Step Solution

1
Calculate Sule's sales commission
Commission = 5%×N150,000=N7,5005\% \times \text{N}150,000 = \text{N}7,500
Sule is entitled to deduct his earned commission as an expense of the joint venture.
2
Prepare the Memorandum Joint Venture Account to determine total venture profit
Total Debits = \text{N}60,000 + \text{N}4,000 + \text{N}40,000 + \text{N}6,000 + \text{N}7,500 = \text{N}117,500. Total Credits (Sales) = \text{N}150,000. Net Profit = \text{N}150,000 - \text{N}117,500 = \text{N}32,500
The Memorandum Joint Venture Account combines all venture revenue and expenses to determine the net profit or loss.
3
Calculate Kalu's share of net profit
Kalu's Profit Share = 35×N32,500=N19,500\frac{3}{5} \times \text{N}32,500 = \text{N}19,500
Profits are shared according to the agreed ratio of 3:2.
4
Determine the final settlement amount payable by Sule to Kalu
Settlement = Goods supplied by Kalu (\text{N}60,000) + Expenses paid by Kalu (\text{N}4,000) + Kalu's Profit Share (\text{N}19,500) = \text{N}83,500
Sule collected all sales proceeds and must reimburse Kalu for his inputs plus his share of profit.

Key Concept

Final settlement calculation under Memorandum Joint Venture method
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Topics

Joint Venture Accounting: No Separate Books (Memorandum Method)

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