Accounting for sharing of capital expenditure and Net Income

[Yoj]

Hi everyone,

Just want to know the proper accounting entries for this scenario. Our company are into buying machines for arcades and one of the malls will have a 50%-50% sharing in the total investments for one of our store outlets. Eventually, Net Income for this store will also be shared 50%-50% between the malls and the company. I would like to know the correct entry as they will be paying us their 50% share of the total investments while the company on the other hand have already recorded these investments in the books as PPE and have paid the total investments. I would also like to know the entry in the recording of the Net Income since only the 50% will remain with us, the other 50% will be our payable to the mall on a monthly basis.

Thank you for your help

 

[smallbushelp]

Is the mall becoming a partner with your company? What does the agreement between the parties specify? What type of entity is your company (e.g. LLC, corporation, etc.)? I'm not as up-to-date on IFRS as I could be, but here in the US, if the mall is becoming a partner, then they are perhaps buying shares in the company or making a capital contribution. Either way, the transaction would be to an equity account.

Any profits paid out then, would be treated as a dividend to a shareholder or a distribution to a partner and would also be an equity transaction to either retained earnings or the partner's capital account, respectively. It will depend on what the agreement between the parties specifies and how the company is structured.

 

[Yoj]

Hi, thanks for your reply (smallbushelp). The mall is a corporation and our company is also a domestic corporation. The mall is not buying shares but just making a capital contribution of 50% of our total investments for this store outlet only and moving forward they will share 50% of our Net Incom. However, we have initially paid for all the investments and have recorded these as part of our PPE. Now, we have to bill them for their 50% share and I'm not so sure how I will record them. Hope you can enlighten me with the correct entry.

Thanks for your assistance!

 

[smallbushelp]

And I assume that they are not guaranteed to be paid back the 50% that they are contributing to your company? In that case, it sounds more like they are reimbursing your company for the expense of purchasing machines, not making an investment. And in that case, generally accepted accounting principles here in the U.S. dictate that the reimbursement be recognized as revenue in the income statement. I would most likely record it as other income below the calculation of net income from operations because the income is not directly attributable to the operation of the arcade.

I hope that helps.