A joint venture is a type of business or investment that is conducted by more than one investor that acts as business partners to each other. The degree of the control of an investor over the business depends upon the percentage of the investment done by a particular investor in the business.
The equity method of joint venture accounting is used by the investor when the concept of significant control is present in joint venture. The equity method states that the original investment is recorded on the actual cost of the investment and it is further adjusted according to the performance of joint venture. In order to use equity method the following calculations can be made:-
Ending Investment in Joint Venture = Initial Investment at actual cost + investor share in the profit and loss – distribution received from the joint venture
The share of investor in the profit and loss of the joint venture is separately recorded in the income statement of the investor. Moreover if there are changes and alteration in the comprehensive income earned by the joint venture the investor must also record the alterations of the comprehensive income in its own income statement.
If the joint venture is suffering from a series of losses the investment made by the investor may also decline due to the incurred losses in the joint venture. If in any case the investment of the joint venture becomes zero the investor stop using the equity method of calculation of the investment, profit and losses in the joint venture.
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