L-NU AA-23-02-01-18

Paramount purchases a landed property at a cost of P110,000,000. In the sale and purchase
agreement, P22,000,000 of the purchase price is attributed to the land portion. The building
consists of 10 floors of equal space. Two floors are used for administrative purposes and the
balance let out to tenants. Paramount also incurs the following costs in connection with the
purchase of the property: Legal and agency fees, P3,000,000; Soft launching cost to market for
tenants, P500,000; Feng shui cost for re-arrangements of interiors, P300,000 and administrative
expenses, P200,000.
1) At what amount should the investment property be initially recognized?

Mortal Company leases an entire shopping complex from Journal Company under a 20-year
operating lease. Under the lease agreement, Mortal would manage and take the risks of
operating the shopping complex for 20 years. It pays a yearly rental of P42,000,000 to Journal
Company. Mortal Company uses 20% of the floor area for its own operations. The rest of the
floor area is sub-leased to other tenants. Mortal Company expects rental income from the
sublease to be about P34,000,000 per year for 20 years. The borrowing costs of Mortal
Company is 8% per year. The cost of constructing the complex incurred by Journal Company is
P460,000,000, transaction and other incidental costs amount to P22,000,000.
2) If Mortal Company elects to treat its interest in the shopping complex as an investment
property, being its interest in the underlying asset, at what amount should the investment
property be initially recognized by Mortal Company?

On January 1, 2014, Trunk Company uses the cost model; for all investment properties, acquired
an investment property at cost of P4,400,000. The estimated life of the property is 40 years,
however, based on the current market trend for similar property that is used for rental, its
economic life is 30 years. The estimated salvage values based on its life is P100,000, while based
on its economic life is, P400,000.
3) What should be the carrying value of the investment property on December 31, 2014?

On July 1, 2014, Strata Company purchases an investment property at a cost of P50,000,000

including transaction costs. On October 1, 2014 the fair value of the property increases to
P52,000,000. At December 31, 2014 the fair value of the property is P46,000,000. The rental
income received per quarter is P1,400,000. The property has a useful life of 50 years.
4) If the company uses the cost model, what is the net effect on the profit or loss for the six
months ended December 31, 2014 in relation to the investment property?
5) If the company uses the fair value model, what is the net effect on the profit or loss for the six
months ended December 31, 2014 in relation to the investment property?

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