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QUESTIONS

1. Define an investment property.

2. Define an owner-occupied property.

3. Give examples of investment property.

4. Give examples of property not considered investment property.

5. Explain the classification of property interest held by lessee in an operating lease.

6. What is the treatment of property that is partly investment and partly owner-occupied?

a. Significant and insignificant portion


b. Ancilliary services provided by the entity

7. What is the treatment of property leased to an affiliate?

8. When is an investment property recognized?

9. Explain the initial measurement of investment property.

10. What is the measurement of investment property subsequent to initial recognition?

11. Explain the cost model and fair value model of measuring investment property.

12. Explain the fair value of investment property.

13. What is the best evidence of the fair value of investment property?

14. Explain the measurement of the investment property if the fair value cannot be determined reliably.

15. Explain transfers of investment property.

16. Explain the measurement of the following transfers:

a. Transfer when the entity uses the cost model.

b. Transfer from investment property carried at fair value to owner-occupied property or inventory.

c. Transfer from owner-occupied property to investment property that is to be carried at fair value.

d. Transfer of inventory to investment property that is to be carried at fair value.

e. Investment property under construction upon completion to be carried at fair value.

17. Explain derecognition of investment property.


PROBLEMS

Problem 14-1 Multiple Choice (PAS 40)

1. It is defined as property (land or building or part of building or both) held by an owner or finance lessee to
earn rentals or for capital appreciation or both.

a. Investment property
b. Owner-occupied property
c. Mining Property
d. Rental Property

2. An owner-occupied property is held by an owner or finance lessee

I. For use in the production of goods and services

For administrative purposes.

a. I only
b. II only
c. Both I and II
d. Neither I and II

3. Investment property includes all of the following, except


a. Land held for long-term capital appreciation.
b. Land held for currently undetermined use.
c. Building owned by the reporting entity or held by a finance lessee leased out under one or more
operating leases.
d. Property held for sale in the ordinary course of business or in the process of construction for such
sale.

4. Which of the following is an investment property?

a. Property being constructed or developed on behalf of third parties.


b. Property that is being constructed and developed as investment property.
c. Property held for future development and subsequent use as owner-occupied property.
d. Owner-occupied property awaiting disposal.

5. Which statement is correct if the property is partly investment and partly owner-occupied?
I. If the investment and owner-occupied portions could be sold or leased out separately, the portions shall
be accounted for separately as investment property and owner-occupied property.

II. If the investment and owner-occupied portions could not be sold or leased out separately, the property is
investment property if only an insignificant portion is held for manufacturing or administrative purposes.

a. I only
b. II only
c. Both I and II
d. Neither I and II
6. If an entity owns and manages a hotel, services provided to guests are significant component of the
arrangement as a whole. In such a case, the hotel is classified as

a. Investment property
b. Owner-occupied property
c. Partly investment property and partly owner-occupied property
d. Neither investment property nor owner-occupied property

7. Which statement is correct concerning property leased to an affiliate?


I. From the perspective of the individual entity that owns t, the property leased to an affiliate is considered
an investment property.

II. From the perspective of the affiliate as a group and for purposes of consolidates financial statements. The
property is treated as owner-occupied property.

a. I only
b. II only
c. Both I and II
d. Neither I and II

8. an investment property is recognized when

I. It is probable that the future economic benefits that are associated with the investment property will flow
to the entity.

II. The cost of the investment property can be measured reliably.

a. I only
b. II only
c. Both I and II
d. Neither I and II

9. Which statement is incorrect concerning initial measurement of an investment property?

a. The investment property shall be measured initially at fair value.


b. The cost of the purchased investment property includes its purchase price and any directly
attributable expenditure.
c. The initial cost of a property interest held under a lease and classified as an investment property shall
be the lower of the fair value of the property and the present value of the minimum lease payments.
d. If payment for an investment property is deferred, its cost is the cash price equivalent.
10. Directly attributable expenditures related to investment property include

a. Professional fees for legal services, property and transfer taxes and other transaction costs.
b. Start up costs.
c. Operating losses incurred before the investment property achieves the planned level of occupancy.
d. Abnormal amounts of wasted material, labor and other resources incurred in constructing or
developing the property.
Problem 14-2 Multiple Choice (PAS 40)

1. Subsequent to initial recognition, the investment property shall be measured at

a. Fair value
b. Cost less any accumulated depreciation and any accumulated impairment losses
c. Revalued amount
d. Either fair value or costs less any accumulated depreciation and any accumulated impairment losses

2. What is the best evidence of fair value of an investment property?

a. Current price in an active market for similar property in the same location and condition.
b. Current price in an active market for property of different nature, condition and location adjusted to
reflect those differences.
c. Recent price of similar property in less active market.
d. Discounted cash flow projection based on reliable estimate of future cash flows.

3. Which statement is incorrect in determining the fair value of an investment property?

a. An entity shall determine the fair value of investment property by deducting transaction costs that may be
incurred upon disposal.
b. The fair value of investment property shall reflect market conditions at the end of the reporting period.
c. If an office is leased on a furnished basis, the fair value of the office generally includes the fair value of
the furniture because the rental income relates to the furnished office.
d. The fair value of investment property excludes prepaid or accrued operating lease income.

4. Which statement is correct if there is inability to determine the fair value of an investment
property reliably?

I. PAS 40 mandates that the entity shall measure such investment property using the cost model until the
disposal the investment property.

II. The residual value such investment property shall be assumed zero under such exceptional circumstances
only.

a. I only
b. II only
c. Both I and II
d. Neither I and II

5. When the entity uses the cost model, transfers between investment property, owner-occupied
property and inventory shall be made at

a. Fair value
b. Carrying amount
c. Cost
d. Assessed value

6. A transfer form investment property carried at fair value to owner-occupied property shall be
accounted for at

a. Fair value, which becomes the deemed cost for subsequent accounting.
b. Carrying amount.
c. Historical cost.
d. Fair value less cost to sell.

7. If owner-occupied property is transferred to investment property that is to be carried at fair


value, the difference between the carrying amount of the property and its fair value shall be

a. Included in profit and loss


b. Included in retained earnings
c. Included in other comprehensive income
d. Accounted for as revaluation of property, plant and equipment

8. If an inventory is transferred to investment property that is to be carried at fair value, the


remeasuremnet to fair value is

a. Included in profit or loss


b. Included in retained earnings
c. Includes in other comprehensive income
d. Accounted for as revaluation of property, plant and equipment

9. When an investment property under construction is completed and to be carried at fair value, the
difference between the carrying amount and fair value shall be

a. Included in profit or loss


b. Included in retained earnings
c. Includes in other comprehensive income
d. Accounted for as revaluation of property, plant and equipment

10. Gain or loss disposal of investment property shall be determined as the difference between the

a. Net disposal proceeds and carrying amount of the asset and shall be recognized in profit or loss.
b. Net disposal proceeds and carrying amount of the asset and shall be recognized in other comprehensive
income.
c. Net disposal proceeds and carrying amount of the asset and shall be recognized in retained earnings.
d. Net disposal proceeds and fair value of the asset and shall be recognized in profit or loss.

Problem 14-3 Multiple Choice (PAS 40)

1. A gain arising from a change in the fair value of an investment property for which
an entity has opted to use the fair value model is recognized in

a. Profit or loss
b. General reserve in the shareholders’ equity
c. Valuation reserve in the shareholders’ equity
d. Retained profits

2. An investment property shall be measured initially at

a. Cost
b. Cost less accumulated impairment losses
c. Depreciable cost less accumulated impairment losses
d. Fair value less accumulated impairment losses
3. In case of property held under an operating lease and classified as investment property

a. The entity has to account for the investment property under the cost model only.
b. The entity has to use the fair value model only.
c. The entity has the choice between the cost model and the fair value model.
d. The entity needs only to disclose the fair value and can use the cost model.

4. Transfer from investment property to property, plant and equipment is appropriate

a. When there is change of use.


b. Based on the entity’s discretion.
c. Only when the entity adopts the fair value model.
d. The entity can never transfer property into another classification once it is classified as investment.

5. An investment property is derecognized when

a. It is disposed to a third party.


b. It is permanently withdrawn from use.
c. No future economic benefits are expected from its disposal.
d. In all of the above cases.

6. Which of the following statements best describes owner-occupied property?

a. Property held for sale in the ordinary course of business


b. Property held for use in the production and supply of goods or services and property held for
administrative purposes
c. Property held to earn rentals
d. Property held for capital appreciation

7. Which of the following terms best describes property held to earn rentals or for capital appreciation?

a. Freehold property
b. Leasehold property
c. Owner-occupied property
d. Investment property

8. Which of the following additional disclosures must be made when an entity chooses the cost model as its
accounting policy for investment property?

a. The fair value of the property


b. The present value of the property
c. The value in use of the property
d. The net realizable value of the property

9. PAS 40 a choice between two different models as the accounting policy to be used in relation to investment
property. Which of the following disclosures shall be made when the fair value model has been asopted?

a. Depreciation method used


b. The amount of impairment loss recognized
c. Useful life or depreciation rate used
d. Net gains or losses from fair value adjustments

10. The following properties fall under the definition of investment property, except?
a. Land held for long-term capital appreciation
b. Property occupied by an employee paying market rent
c. Land held for a currently undetermined use
d. A building owned by an entity and leased out under an operating lease

Problem 14-4 (IFRS)

Eragon Company and its subsidiaries own the following properties that are accounted for in accordance with
international accounting standards:

Land held by Eragon for undetermined use 5,000,000


A vacant building owned by Eragon and to be leased out under an operating lease 3,000,000
Property held by subsidiary by Eragon, a real estate firm, in the ordinary course of business 2,000,000
Property held by Eragon for use in production 4,000,000
Building owned by a subsidiary of Eragon and for which the subsidiary
provides security and maintenance services to the lessees 1,500,000
Land leased by Eragon to a subsidiary under an operating lease 2,500,000
Property under construction for use as investment property 6,000,000
Land held for future factory site 3,500,000
Machinery leased out by Eragon to an unrelated party under an operating lease 1,000,000

Required:

1. Compute the total investment property that will be shown in the consolidated statement of financial of
position of Eragon Company and its subsidiaries.

2. Indicate the classifications of the assets that are excluded from investment property.

Problem 14-5 (IFRS)

Galore Company ventured into construction of a condominium in Makati which is rated as the largest state-of-the art
structure. The entity’s board of directors decided that instead decided that instead of selling the condominium, the
entity would hold this property for purposes of earning rentals by letting out space to business executives in the area.

The construction of the condominium was completed and the service on January 1, 2009. The cost of the
construction was P50 million. The useful life of the condominium in 25 years and its residual value is P5 million.
An independent valuation expert provided the following far value at each subsequent year end:

December 31, 2009 55 million


December 31, 2010 53 million
December 31, 2011 60 million

Required:

Prepare all indicated entries for 2009, 2010 and 2011 assuming the investment property is accounted for under the
cost model and fair value model.

Problem 14-6 (IFRS)

Bona Company purchased an investment property on January 1, 2006 for a cost of P2, 200,000. The property had a
useful life of 40 years and at December 31, 2008 had a fair value of P3, 000,000. On January 1, 2009 the property
was sold for net proceeds of P2, 900,000. Bona uses the cost model to account for the investment property.
What is the gain or loss to be recognized in profit or loss for the year ended December 31, 2009 regarding the
disposal of the property?

a. 865,000 gain
b. 810,000 gain
c. 100,000 loss
d. 700,000 gain

Problem 14-7 (IFRS)

Dayanara Company owns three properties which are classified as investment properties. Details of the properties are
given below:

Property 1
Property 2
Property 3

Each Property was


acquired in 2005 with
a useful
Initial Cost

2, 700,000
3, 450,000
3, 300,000

Fair Value at
12/31/2008

3, 200,000
3, 050,000
3, 850,000

Fair value at
12/31/2009

3, 500,000
2, 850,000
3, 600,000