EXAMINATION about INVESTMENT 17

General Rule: Read the following carefully and answer it wisely. All solutions are needed, so put it in the last
page. (30 Points)

1. On January 2, 2011, Grand Company made a test of impairment on one of its building carried as plant asset. The
test on impairment revealed a recoverable value of P5,500,000 on that building, The carrying value of this
building as of January 2, 2011 is P8,000,000 with a remaining useful life of 10 years. On January 2, 2013, Grand
Company decided to convert the building into an investment property that is to be carried at fair value. The cost of
converting the building is insignificant but as a result of the change in the usage, the fair market value of the
building was reliably valued at P7,000,000.

Question 1: What amount of unrealized gain/revaluation surplus should grand company recognize in its shareholder’s
equity on the date of transfer?
a. None c. P 600,000
b. P2,000,000 d. P2,600,000
Answer: C
Carrying value – Jan 2, 2011 P8,000,000
Less: FMV – Jan 2, 2011 P5,500,000
Impairment loss – to P/L P2,500,000

FMV – Jan 2, 2011 P5,500,000

Less: Depreciation for year 2011/2012
(P5,500,000 / 10 years x 2 year) P1,100,000
Carrying value – Jan 1, 2013 P4,400,000

Carrying value – Jan 2, 2011 P8,000,000

Less: Depreciation for 2011/2012
(P8,000,000 / 10 years x 2 years) P1,600,000
Carrying value – 1.1. 13(no impairment) P6,400,000

FMV – Jan 2, 2013 P7,000,000

Carrying value – Jan 1, 2013 P6,400,000
Revaluation Surplus – SE P 600,000

Question 2: what amount of realized revenue/ impairment recovery should Grand Company recognize in its profit or loss
statement on the date of transfer?
a. None c. P 600,000
b. P2,000,000 d. P2,600,000
Answer: B
Carrying value – 1.2.13(no impairment) P6,400,000
Less: Carrying value – 1.2.13 P4,400,000
Impairment recovery P2,000,000

2. On January 2, 2002, Power Company acquired a building costing P6,000,000. Power Company estimated that
useful that the life of the property is 20 years. Power Company’s policy is to depreciate all depreciable assets
using the straight-line method, without scrap. On January, 2, 2007, the building was re-measured at P3,000,000
 and with a remaining revised useful life of 20 years. On January 2, 2012 Power Company converted the property
into investment property when the fair value is P3,500,000.

Question 1: On January 2, 2012, what amount of gain or impairment recovery should the company recognize?
a. None c. P 125,000
b. P1,125,000 d. P1,250,000
Answer: B
Carrying value – Jan 2, 2007 P4,500,000
Less: FMV – Jan 2, 2007 P3,000,000
Impairment loss – to P/L P1,500,000

FMV – Jan 2, 2007 P3,000,000

Less: Depreciation for year 2007/2011
(P3,000,000 / 20 years x 5 year) P 750,000
Carrying value – Jan 2, 2012 P2,250,000

Carrying value – Jan 2, 2011 P4,500,000

Less: Depreciation for 2007/2012
(P4,500,000 / 20 years x 5 years) P1,125,000
Carrying value – 1.1. 13(no impairment) P3,375,000

Carrying value – 1.2.13(no impairment) P3,375,000

Less: Carrying value – 1.2.13 P2,250,000
Impairment recovery P1,125,000

Question 2: What amount of unrealized gain or revaluation surplus should Grand Company recognize in its shareholders’
equity on the date of transfer?
a. None c. P 125,000
b. P1,125,000 d. P1,250,000
Answer: C
FMV – Jan 2, 2012 P3,500,000
Carrying value – Jan 1, 2013 P3,375,000
Revaluation Surplus – SE P 125,000

3. On January 2, 2010, Haven Corporation acquired a track of land that is to be sold in the ordinary conduct of
business. The purchase price of the property of P50,000,000 was paid in cash and total transaction of P500,000
related to the acquisition of the property was also paid at a later date. The land was subdivided into 2, 000 lots
(200 square meters for every lot) for an additional cost of P5,500,000. On December 31, 2010, The market value
of the lot was P1,500 per square meter.

As of December 31, 2011, only 20,000 square meters are still unsold and market of the lot had increased to P1,600 per
square meter. On this date, Haven Corporation decided to transfer the remaining lots into investment property that is to be
carried under the fair value model. There was no additional cost incurred on the change of infection on the property.
What amount of gain should Haven Corporation recognize as a result of the transfer?
a. P29,200,000 c. P29,225,000
b. P29,475,000 d. P29,500,000
Answer: A
Cash price of the property P50,000,000
Add: Transaction cost 500,000
Total cost P50,500,000
Add: Subsequent cost (Dev’t cost) 5,500,000
Total cost P56,000,000
÷ Number of lots 2,000
Unit cost per lot P 28,000
÷ No of sq.m / lot 200
Unit cost /sqm P 140

FV – date of transfer (20,000 x P1,600) P32,000,000

Less: Cost of Inventory (20,000 sqm x P140) P 2,800,000
Gain on transfer P29,200,000

4. In 2010, Tremor Company has an investment property with a carrying amount of P40,000,000 is destroyed by
fire. The building element of the property was carried at P12,000,000. A claim was made for compensation to the
company’s insurers, but has not been agreed at the time the financial statements for 2010 are issued. In 2011, the
claim is agreed and the company receives P20,000,000 in compensation. Also, at the end of year 2011 a
replacement building is constructed at a cost of P16,000,000.

Question 1: What amount of impairment loss should Tremor Company recognize in its 2010 statement of comprehensive
income?
a. None c. P12,000,000
b. P16,000,000 d. P40,000,000
Answer: C
Note: For the year 2010, Tremor Company recognizes an impairment loss of P12,000,000 in respect of the loss of the
building. The element is not impaired but the company would continue to account for that element as investment
property.

Question 2: What amount of insurance claim should Tremor Company recognize in its 2010 statement of comprehensive
income?
a. None c. P12,000,000
b. P16,000,000 d. P20,000,000
Answer: A
Note. The insurance claims has not been agreed at the end of 2010 and so no compensation is receivable at the end of
2010 and none can be recognized.

Question 3: what amount of insurance claim should Tremor Company recognize in its 2011 statement of comprehensive
income?
a. None c. P12,000,000
b. P16,000,000 d. P20,000,000
Answer: D
Note: In year 2011 compensation of P20,000,000 is receivable and so, it is also recognized in the statement of
comprehensive income for that year.

Question 4: What is the carrying value of the investment property in Tremor Company’s statement of financial position
for the year ended December 31, 2011?
a. P16,000,000 c. P28,000,000
b. P36,000,000 d. P44,000,000
Answer: D
Note: The compensation may be not be offset against the cost of replacement building. Instead, the cost of replacement
building of P16,000,000 is capitalized and added to the carrying amount of the investment property (the land element ) of
P28,000,000 to arrived at the carrying value of the investment in property.

Question 5: Assuming the compensation of P20,000,000 become receivable during 2011, How should the compensation
and impairment loss be presented in the statement of comprehensive income of 2010?
a. Report a revenue of P20,000,000
b. Report an impairment loss of P12,000,000
c. Report a net revenue of P8,000,000
d. Report the revenue a P20,000,000 separately and impairment loss of P12,000,000 separately.
Answer: D

Fund & other Investments

5. The following information relates to non-current investment that Dragon Company placed in trust as required by
underwriter of its bonds: Bond sinking fund balance, January 1, 2011, P2,000,000; Additional investment during
2011, P500,000; Interest revenue, P20,000; administrative costs, P15,000; Carrying value of bonds payable,
P3,000,000.

What amount should Dragon Company report in its December 31, 2011 balance sheet related to its non-current investment
for bond sinking fund requirements?
a. P2,000,000 c. P2,500,000
b. P2,505,000 d. P3,000,000
Answer: B
Beginning balance P2,000,000
Add/Deduct:
Additional investment P 500,000
Interest income P 20,000
Expense in admin the fund P ( 15,000)
Carrying value of investment P2,505,000