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Definition:
Investment in equity interest of joint venture is accounted under the similar way as Investment in Associates. Investment in an entity where multiple organisations has operational control over different areas. In this case, the control is of more relevance than the ownership stake in the joint venture entity.
Level of Ownership in an entity determines the status of the relationship,
(i) holding >50% (controlling stake - subsidiary),
(ii) holding >20% & <50% (significant influence - associate) and
(iii) holding <20% (investment at fair value).
Accounting for the Investment in Joint Venture can be at (i) at cost or (ii) using equity method. In the equity method, own share of net income of investee company needs to be added to the cost of investments. Under the equity method of accounting, own share of net income is to be added to the value of investments. Any dividend received from associates is to be accounted by reducing the value of investment in associates.
Accounting Entries:
Accounting under Cost Method:
Payments made to Investment in Joint Ventures:
Investment in Joint Ventures A/c DR
Cash/Bank A/c CR
Amount: Payments made to acquire investment in joint ventures.
Dividend received from Joint Ventures:
Cash/Bank A/c DR
Dividend Income A/c CR
Amount: Dividend amount received from Joint Venture company.
Disposal of Investment in Joint Ventures:
Cash/Bank A/c DR
Loss on Sale A/c DR
Investment in Joint Ventures A/c CR
Gain on Sale A/c CR
Amount: If the sale price > book value, then gain. If the sale price < book value, then loss.
Book value = Cost of investment plus/minus share of net income in joint ventures.
Accounting under Equity method:
Payments made to Investment in Joint Ventures:
Investment in Joint Ventures A/c DR
Cash/Bank A/c CR
Amount: Payments made to acquire investment in joint venture.
Recognition of share in net income for the period:
Investment in Joint Ventures A/c DR
Income from share in Joint Venture A/c CR
Amount: Portion of net income pertaining to the investor's entity accounted.
Dividend received from Associates:
Cash/Bank A/c DR
Investment in Joint Ventures A/c CR
Amount: Dividend amount received from Joint Venture company.
Disposal of Investment in Associates:
Cash/Bank A/c DR
Loss on Sale A/c DR
Investment in Joint Ventures A/c CR
Gain on Sale A/c CR
Amount: If the sale price > book value, then gain. If the sale price < book value, then loss.
Book value = Cost of investment plus/minus share of net income in joint ventures.