Joint venture

Joint venture

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I need a wise head as I can't settle on the accounting treatment of a transaction.

2 companies agree to manufacture an item of equipment which will be used in the businesses.

One company fully funds the other to cover the costs (lets say £10k), the other uses the money to buy the parts, etc and to pay wages its employees who manufacture the item.

Let's say the total costs incurred are exactly £10k so the manufacturing company has spent the whole of the budget.

My question is how is this accounted for in the end of year accounts? 

Presumably each company shows £5k on the balance sheet for the cost of the asset but how do we get to that point?

Company 1 - has paid £10k to the other and has a £10k bank overdraft.

Company 2 - has received £10k and paid it out in manufacturing costs.

Although there are different directors in each company at the moment, the next stage is that a new company will be set up which will own the asset so it will have to be sold by each company to the new company, presumably for £5k each.

A further complication is that company 2 has now registered for VAT and as it partly owns the asset on the date of registration, then it can claim back the input VAT on the costs of manufacture. As all the invoices are in the name of company 2, can it claim all the VAT back or only 50% of it in line with the ownership?

Thank you in advance for any advice.

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By bigdave1971
24th Oct 2013 10:19

No takers?

Does anyone have any thoughts or maybe I haven't explained the situation well enough?

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