Reference no: EM133005847

In early 2020, Entities A and B (the parties) make arrangements through separate legal entities (Entities X) which have 60% and 40% voting rights, respectively. Decisions on the relevant activities of such arrangements require the consent of 80% of voting rights. Entity X's legal form states that assets and liabilities held in Entity X constitute assets and liabilities of Entity X and are not assets and liabilities of Entities A and B. The parties (A and B) do not make contractual arrangements to modify the rights and obligations granted under the legal form of Entity X. In addition, Entity X is required to sell all supplies produced only to Entities A and B. Sales to other parties are not permitted. Consequently liabilities incurred to Entity X are, in substance, met by cash flows received from entities A and B through their purchase of output sold by Entity X.

During 2020:

• The total revenue of Entities X from sales to parties A and B is Rp18,000,000 and Rp12,000,000, respectively.
• The cost of goods sold by Entity X is Rp16,000,000.
• Entity A resells all inventory purchased from Entity Z in 2021.

Problem 1: Determine the type of joint arrangement.

Problem 2: Calculate what share of the profits recognized by Entity A on such joint arrangements in 2020.