IAS 40 - example-converted investment properties practice questions PDF

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This document contains two Ias40 practice questions. The questions tests whether you can recognise and journalise transactions as investment properties...

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IAS 40 Question 10.10 – pg. 104 Angazi Limited owns an office park that it developed during the current reporting period. It is also a lessee in a number of properties held under lease agreements. Angazi Limited’s head office is situated in the office park in a stand-alone building. The balance of the office park, containing two stand-alone properties, is let to tenants under non-cancellable operating leases. The Chief Executive Officer of Angazi Limited has insisted that the financial manager measures all their properties using the cost model per IAS 16 Property, Plant and Equipment since he believes this model is the cheapest measurement model to implement (as fair values will not be required) and would have the least impact on the financial statements. Required: Prepare a letter to the financial manager of Angazi Limited explaining how these properties should be recognized and measured, also indicating whether the Chief Executive Officer’s assumptions are correct. Question 10.14 – pg. 107 Owlface Limited owns two buildings: • a head office building located in Johannesburg; and • another office building located in Pretoria. The office building located in Johannesburg is used as Owlface Limited’s head office. A minor earthquake, on 30 June 20X5, destroyed this building. The building in Johannesburg was purchased on 1 January 20X5 for R1 200 000. The building has a total useful life of 10 years and a residual value of nil. The property in Pretoria was leased under a short-term lease to a tenant, Spider Limited. After the earthquake, Owlface Limited urgently needed new premises for its head office. Since Spider Limited was always late in paying theie lease rentals, Owlface Limited decided to evict them and move its head office to this building in Pretoria. This eviction and relocation was effective from 30 June 20X5. • The building in Pretoria was purchased on 1 January 20X5 for R500 000. • On 30 June 20X5, the fair value of the building in Pretoria was R950 000. • There was no change in fair value at 31 December 20X5. • The total useful life was estimated to be 10 years from date of purchase and the residual value was estimated to be nil. Owlface Limited uses: • The cost model to measure its property, plant and equipment; and • The fair value model for its investment properties. Required: a) Journalise the above transactions in the books of Owlface Limited for the year ended 31 December 20X5. Ignore tax. b) Define investment property and owner-occupied property. c) Define fair value and explain how it is calculated....