1 SIM answer key - Investment property PDF

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Let’s CheckFill in the blanks (ULO a and d): On the space provided for, write the answer on the items described or defined. _ Gain ________ from disposal of investment property is the excess of the net disposal proceeds after deducting the carrying amount of the investment property. _Revaluation The...

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Let’s Check Fill in the blanks (ULO a and d): On the space provided for, write the answer on the items described or defined. 1. _Gain________ from disposal of investment property is the excess of the net disposal proceeds after deducting the carrying amount of the investment property. 2. _Revaluation The account used for the difference between the carrying amount and fair value if owner-occupied property is to be transferred as investment property under fair value model. 3. Gain from change in fair value When the fair value of the investment property increased compared to its carrying amount at the start of the year, what is the treatment of the amount of difference? 4. _Carrying Amount_When cost model is used by an entity, transfers between investment property, owner-occupied property and inventory shall be made at this amount. 5. __Income statement_ When an investment property is carried at fair value, any changes in the fair value is reported in _____________ statement. 6. ____Gain______ from disposal of investment property is the excess of the net disposal proceeds after deducting the carrying amount of the investment property. 7. _Fair value model Under this model, transfers from investment property shall be made at fair value. 8. _Cost Model___This subsequent measurement of investment property carry the investment at cost less accumulated depreciation and accumulated impairment losses with Fair value disclosure. 9. Investment Property It refers to land or buildings held primarily to earn rentals or for capital appreciation. 10. Change of use Examples of these are commencement of owner occupation, Commencement of development with a view to sale, end of owner-occupation, commencement of an operating lease from owner-occupied property to investment property. True or False: Write true if the statement is correct and false if the statement is wrong. 11. Property that is leased to another entity under a finance lease is an example of investment property. False 12. Property held for future use as owner occupied property is an example of investment property. False 13. An investment property held by a lessee as a right of use asset shall be recognized in accordance with IFRS 16. True 14. The cost of an investment property is not increased by start up costs (unless they are necessary to bring the property to the condition necessary for it to be capable of operating in the manner intended by management. True 15. The cost of an investment property does include operating losses incurred before the investment property achieves the planned level of occupancy. False 16. The cost of an investment property held by a lessee as a right-of-use asset is measured initially at cost in accordance with IAS 40. False

Let’s Analyze Activity 1. (ULO c) Getting acquainted with the essential knowledge in the study of accounting for investment property, what also matters is you should be able to solve and journalize transactions on a problem situation. Now, I will require you to prepare journal entries on the following problems and also answer questions being asked. This will be graded for class assignments/seatwork. I will accept handwritten solutions and answers only uploaded through LMS. Exercise 1. Rustom company purchased an investment property on January 1, 20A for a cost of 4,400,000. The property had a useful life of 40 years and on December 31, 20C had a fair value of 6,000,000. On December 31, 20C the property was sold for net proceeds of 5,800,000. The entity used the cost model to account for the investment property. a.

What is the gain or loss to be recognized for 20C regarding the disposal of the investment property? b. Prepare the entry to record the disposal under cost model and revaluation model Answers: a. 4,400,000/40

=

Net proceeds Carrying amount Gain on disposal

110,000

*

5,800,000 (4,070,000) 1,730,000

(4,400,000-330,000)

b. Cost Model entry upon disposal Cash 5,800,000 Accum. Dep’n 330,000 Investment Property 4,400,000 Gain on disposal 1,730,000

3

=

330,000

FV model entry upon disposal Cash 5,800,000 Loss on disposal 200,000 Investment property 6M

Exercise 2. Gallery Company venture into construction of high rise building for the purpose of earning rentals by letting out space to business executives in the area. The construction of the building has been completed on January 1, 20A for a total cost of 80,000,000. The useful life of the property is for 25 years with a residual value of 8,000,000. An independent valuation expert provided the following fair value at each subsequent year-end: December 31, 20A 88,000,000 December 31, 20B 84,800,000 December 31, 20C 96,000,000 Required: Prepare journal entries for 20A, 20B and 20C: a. The investment property is subsequently measured at cost model;

b. The investment property is subsequently measured at revaluation model Answer A. Cost Model 20A Investment property 80,000,000 Cash 80,000,000

B. Revaluation Model 20A Investment property 80,000,000 Cash 80,000,000

Depreciation expense 2,880,000 Accumulated depreciation 2,880,000

Investment property 8,000,000 Gain from change in FV8,000,000

20B Depreciation expense 2,880,000 Accumulated Dep. 2,880,000

Loss from change in FV 3,200,000 Investment property 3,200,000

20C Depreciation expense Accum. Dep.

Investment property 11,200,000 Gain from change in FV 11,200T

2,880,000 2,880,000

Exercise 3. (Adapted Valix 2015 volume 1 page 929) Considerate company has a single investment property which had an original cost of 11,600,000 on January 1, 20A. On Dec. 31, 20A the fair value was 12,000,000 and on Dec. 31, 20B the fair value was 11,800,000. On acquisition, the property had a useful life of 40 years. What is the entry to recognize the expense in profit or loss for the year ended December 31, 20B under the fair value model and cost model? Answer Cost Model

Fair Value Model

Depreciation expense 290,000 Accumulated dep. 290,000

Loss from change in FV 200,000 Investment property 200,000

In a Nutshell (ULO b) Using the problem below, answer in paragraph form, observe correct grammar and in minimum of 50 words. Problem: Dylan Company owned three investment properties with the following details: Initial cost FV 12/31/20B FV 12/31/20C Property 1 2,430,000 2,880,000 3,150,000 Property 2 3,105,000 2,745,000 2,565,000 Property 3 2,970,000 3,465,000 3,240,000 Each property was acquired in 20B of January with a useful life of 25 years. The accounting policy is to use the fair value model for investment properties. Dylan Company is seeking for your advice as to how they will present the carrying amount of the investment property on Dec. 31, 20B and Dec. 31, 20C.

Give a clear presentation to Dylan Company as to the choices available in accordance with Standard 40. Answer: elaborate explanation includes the entries……. Since FV model is used, the carrying amount on December 31, 20B is equal to its FV at that date which is 9,090,000. An also, the balance on December 31, 20C shall be its FV at that date which is 8,955,000....