Examkin

Question

Difficulty: MediumJoint Venture Accounting: Separate Set of Books Method

Zainab and Babatunde entered into a joint venture to trade in office equipment, maintaining a separate set of books. They opened a Joint Bank Account, contributing ₦4,000,000₦4,000,000 and ₦2,000,000₦2,000,000 respectively, and agreed to share profits and losses in the ratio of 2:12:1.

The transactions during the venture were as follows:
- Materials purchased via Joint Bank: ₦3,200,000₦3,200,000
- Carriage inwards paid by Zainab from personal funds: ₦150,000₦150,000
- Operating expenses paid via Joint Bank: ₦250,000₦250,000
- Total sales revenue deposited into Joint Bank: ₦4,800,000₦4,800,000
- Unsold stock taken over by Babatunde at an agreed value: ₦300,000₦300,000

What is the final cash amount payable to Zainab upon closure of the Joint Bank Account?

  1. ₦5,150,000Answer
  2. B
    ₦5,000,000
  3. C
    ₦4,750,000
  4. D
    ₦4,900,000

Answer

The final cash amount payable to Zainab is ₦5,150,000.
Under the Separate Set of Books method, the Joint Venture Account is prepared like a trading and profit & loss account to find the net profit of ₦1,500,000 (Credits of ₦5,100,000 minus Debits of ₦3,600,000). Zainab's share of this profit is 2/3 of ₦1,500,000, which equals ₦1,000,000. Her personal account is credited with her initial capital deposit (₦4,000,000), personal expenditure on carriage inwards (₦150,000), and her profit share (₦1,000,000), yielding a final settlement payable to her of ₦5,150,000.

Step-by-Step Solution

1
Calculate the total debits (expenses/purchases) to the Joint Venture Account
Total Debits = ₦3,200,000 (materials) + ₦150,000 (carriage inwards) + ₦250,000 (operating expenses) = ₦3,600,000
All costs directly related to the venture must be debited to determine total expenditure.
2
Calculate the total credits (income/asset transfers) to the Joint Venture Account
Total Credits = ₦4,800,000 (sales revenue) + ₦300,000 (stock taken over) = ₦5,100,000
Sales revenue and the agreed valuation of inventory taken over by a venturer are credited to the Joint Venture Account.
3
Determine the net profit of the Joint Venture
Net Profit = Total Credits - Total Debits = ₦5,100,000 - ₦3,600,000 = ₦1,500,000
Net venture profit is the excess of total revenue and stock value over total venture expenditure.
4
Calculate Zainab's share of the net profit
Zainab's Profit Share = (2 / 3) × ₦1,500,000 = ₦1,000,000
Profits are distributed according to the agreed ratio of 2:1.
5
Calculate Zainab's final ledger account balance for cash settlement
Zainab's Final Settlement = ₦4,000,000 (capital contribution) + ₦150,000 (expenses paid) + ₦1,000,000 (profit share) = ₦5,150,000
Zainab's personal account is credited for her initial contribution, expenses borne personally, and her share of venture profit.

Key Concept

Separate Set of Books Method in Joint Venture Accounting
Estimated Time:1m 30s
Rate this question

Topics

Joint Venture Accounting: Separate Set of Books Method

More questions from this topic