UNIT 4

Accounting for Investments

Topic 5 – Investment in Property
Pretest:

Problem 1: TRUE or FALSE (page 378) ACCTG. 1-B

FALSE 1.An entity may classify assets other than land and/or building as an investment property.

TRUE 2.The lump sum acquisition cost of land and building need not be allocated to the land and
building if both assets are classified as investment property measured under the fair value model.

TRUE 3.In some cases, a building that is being used partly as an owner-occupied property and partly
as held for rentals, under operating lease, is presented in the statement of financial position as partly
PPE and partly investment property.

TRUE 4.Heidel Co, exchanges a piece of land for another land with Sol Co. Heidel classifies the land
as investment property. The land given to Sol has a fair value of P20, while the land received from Sol
has a fair value of P24. Heidel Co. paid P3 cash to Sol on the exchange. Heidel Co. shall initially
recognize the land received from Sol at P23.

FALSE 5.Under the fair value model of PAS 40, investment properties are initially and subsequently
measured at fair value.

TRUE 6.Under the fair value model, gains or losses resulting from changes in fair value are recognized
in profit or loss.

TRUE 7.Investment properties measured under the fair value model are not depreciated even if the
investment property is depreciable, e.g., building.

TRUE 8.Transfers to, or from, investment property shall be made when, and only when, there is a
change in use.

TRUE 9.During the period, Whirl Co. reclassifies a building that was previously used as office space to
investment property. Whirl Co. shall apply PAS 16 until the date of reclassification.

FALSE 10.Tupper Co. replaces the escalator in its building that is classified as investment property.
The newly installed escalator has a cost of P1M, while the carrying amount of the old escalator that was
replaced is P200K. Tupper Co. shall recognize loss of P800K on the replacement of the old escalator.
Activity 1
Answer Problems 2 and 3 of the Chapter 21 of your book Intermediate Accounting 1 B.
Problem 2
1. D
2. B
3. B
4. 700,000 (Farming land purchased for its investment potential. Planning permission has not
been obtained for building constructions of any kind)
5. C
6. B
7. B
8. A
9. P 1,450,000
Solution:
Purchased building P 1,200,000
Professional fees and taxes 50,000
Repairs and renovation (Materials, labor and overhead) 200,000
Total Cost P 1,450,000

10. FAIR VALUE MODEL

Requirement (a): Statement of P/L

Year 2007 Year 2006

FV (Property X) 20,000,000 - 15,000,000 = 5,000,000
FV (Property Y) 8,000,000 - 10,000,000 = (2,000,000)
Total 28,000,000 - 25,000,0000 = 3,000,000 unrealized gain (12/31/2007)

Requirement (b): Statement of financial position

Year 2007
FV (Property X) 20,000,000
FV (Property Y) 8,000,000
Total – 12/31/2007 28,000,000
Requirement (c): Adjusting entry (12/31/2007)

Investment property 3,000,000

Unrealized gain 3,000,000

11. (COST MODEL)

Requirement (a): Statement of P/L (12/31/2007)
Original cost Est. useful life
Property X 9,000,000 / 10 years = 900,000
Property Y 9,000,000 / 10 years = 900,000
1,800,000 depreciation expense
 Requirement (b): Statement of financial position

Year 2007
Cost (Property X) 9,000,000 x 3 / 10 = 2,700,000
Cost (Property Y) 9,000,000 x 3 / 10 = 2,700,000
5,400,000 accumulated depreciation
Cost (Property X and Y) 18,000,000
Accumulated depreciation (5,400,000)
Carrying amount – 12/31/2007 12,600,000

Requirement (c): Adjusting entry (12/31/2007)

Depreciation expense 1,800,000

Accumulated depreciation-IP 1,800,000

12. D
13. C
14. (JOURNAL ENTRIES)

a.

Investment property (fair value) 800,000

Accumulated depreciation 4,000,000
Impairment loss (squeeze) 200,000
Building 5,000,000

b.
Investment property (fair value) 1,400,000
Accumulated depreciation 4,000,000
Building 5,000,000
Revaluation surplus (squeeze) 400,000

c.
Investment property (carrying amt.) 1,000,000
Accumulated depreciation (5M – 1M) 4,000,000
Building 5,000,000

Problem 3
1. ABC Co. has the following assets on December 31,20x1:
Land held for long-term capital appreciation 200,000
Land held for a currently undetermined future use 700,000
Land held for future plant site 1,000,000
Land held for sale in the ordinary course of business 100,000
Building rented out under finance lease 1,900,000
Building rented out under operating lease 800,000
 Equipment leased out under an operating lease 50,000

Requirement (a): Total amount of investment property

Land held for long-term capital appreciation 200,000

Land held for a currently undetermined future use 700,000
Building rented out under operating lease 800,000
Total investment property 1,700,000

Requirement (b): Classification of the items not classifiable as investment property

Land held for future plant site 1,000,000 – PPE (PAS 16)
Land held for sale in the ordinary course of business 100,000 - Inventory (PAS 2)
Building rented out under finance lease 1,900,000 – Not an asset of ABC Co.
Equipment leased out under an operating lease 50,000 - PPE (PAS 16)

2.
Case 1 (Investment property and net of depreciation in 12/31/x9 under cost model)

Acquisition cost P 1,200,000

Titling cost 50,000
Repairs and renovation 200,000
Total cost P 1,450,000

Cost P 1,450,000
Accumulated depreciation [(1.45M / 10) x 6/12] (72,500)
Carrying amount – 12/31/20x9 P 1,377,500

Case 2 (Year-end adjusting entry under FV model)

Unrealized loss from change in fair value (1.4M – 1.45M) 50,000

Investment property 50,000

3. 0. The property is classified as investment property.

4. 0. From the group’s perspective, the property is owner-occupied. Thus, the building is classified as
PPE in the consolidated financial statements.

5.
Case 1 (Cost model – PPE to IP)

Dec. Investment property 700,000

31, Accumulated depreciation – Bldg. (1M x 3 /10) 300,000
20x9 Building 1,000,000
To record the transfer from PPE to investment property

Case 2 (Fair value model – PPE to IP)

 Dec. Depreciation expense 300,000
31, Accumulated depreciation – Bldg. (1M x 3 /10) 300,000
20x9 To recognize depreciation from Jan.1, 20x7 – the date of transfer

Dec. Investment property (fair value) 900,000

31, Accumulated depreciation – Bldg. (1M x 3 /10) 300,000
20x9 Building 1,000,000
Revaluation surplus 200,000
To record the transfer from PPE to investment property

Case 3 (Cost model – PPE to IP)

Dec. Investment property 600,000

31, Accumulated depreciation – Bldg. (1M x 3 /10) 300,000
20x9 Impairment loss (squeeze) 100,000
Building 1,000,000
To record the transfer from PPE to investment property

6. Fair value model - Inventory to IP

Dec. Investment property (fair value) 930,000

31, Loss on transfer (930K – 1M) 70,000
20x9 Inventory 1,000,000
To record the transfer from inventory to investment property

7. None. Under PAS 40, Dream Theater Co. is not permitted to reclassify the property back to
inventory because there is no change in use, that is, there is no commencement of development
with a view to sale.

8. None. Under PAS 40, Steve Morse Co. is not permitted to reclassify the property since it will still be
used as investment property after redevelopment, it continues to be classified as investment
property during the renovation.

9. Cost Model – IP to PPE

Dec. Building (fair value) 3,600,000

31, Accumulated depreciation (6M x 4/10) 2,400,000
20x1 Investment property 6,000,000
To record the transfer from investment property to PPE

10. Self-constructed property under fair value model

Investment property (1.5M + 1.2M + 1M) 3,700,000

20x1 Cash 3,700,000
To record the cost of construction

Dec. Investment property (4M – 3.7M)) 300,000

31, Unrealized gain on change in fair value 300,000
20x1 To record year-end adjustment

11.
Investment property (4M x 2/5) P 1,600,000

12. P 1,200,000 (the ancillary services provided are insignificant to the arrangement as a whole.
Thus, it is included to the investment property.)
 13.

Accumulated depreciation (4.2M x 2/6) 1,400,000

Loss on fire (squeeze) 2,800,000
Investment property 4,200,000

Activity 2
Answer Problems 5 and 7 of the Chapter 21 of your book Intermediate Accounting 1 B.
Problem 5

1. E
2. C
3. C
4. D
5. D
6. A
7. C
8. D
9. D
10. C

Problem 7

1. D
2. C
3. A
4. D
5. D
6. D
7. C
8. C