IAS 40 “Investment properties” 

Exercise 1:

Choose the most correct answer for each question below, unless otherwise stated.
1. Which of the following would be recognised as an investment property under IAS 40 in the
consolidated financial statements of Build Co?
A. A property intended for sale in the ordinary course of business
B. A property being constructed for a customer
C. A property held by Build Co as a right-of-use asset and leased out under a six-month
lease
D. A property owned by Build Co and leased out to a subsidiary

2. When an investment property, accounted under fair value model, is reclassified as owner-
used asset (PPE), the accumulated revaluation reserve relating to that asset will be:
A. Not applicable
B. Transferred to retained earnings
C. Transferred to other reserves
D. Remained as revaluation reserve until the asset is disposed

3. Which of the following statement is correct when applying fair value model and revaluation
model?
Fair value Revaluation
A. An increase in fair value of an equipment P/L OCI
B. Depreciation expense P/L P/L
C. A decrease in fair value of a house P/L P/L
D. Depreciation expense OCI P/L

4. ABC Ltd. chooses cost model for its investment property. At 1 Jan 20x8, ABC Ltd.
transferred an investment property to an owner-occupied property. Investment property has
originally cost of $20 million; accumulated depreciation up to the date of transfer was $12
million, there was no impairment loss; property’s fair value at 1 Jan 20x8 was $14 million.
What was the carrying value of the owner-occupied property recorded at 1 Jan 20x8?
A. $8 million
B. $14 million
C. $12 million
D. $2 million

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5. Entity A applies cost model to account for investment properties. How should entity A
recognise changes in the fair value of its investment properties at the end of each reporting
period?
A. Recognise directly to changes in equity
B. Recognise to other comprehensive income
C. Recognise to profit or loss
D. Disclose such changes in the notes only

6. Which of the following would be classified as investment property under IAS40?

A. Retail premises leased from the entity by shopkeepers
B. Retail premises owned by the entity
C. Retail premises leased to an agent who leases them to shopkeepers
D. Retail premises under construction and for subsequent sale

7. Which of the following is not an example of investment property?

A. Land held for undetermined future use
B. Property leased to another entity under a finance lease
C. Property leased to another entity under an operating lease
D. Property being constructed for future use as an investment property

8. Which of the following is not a transfer from or to investment property under IAS 40?
A. Commencement of owner occupation
B. Transfer from undetermined use to an operating lease
C. Commencement of development with a view to sale
D. End of construction of development

9. Hook Ltd purchases an investment properties on 1 July 20X0 for $100,000. At 30 June 20X1,
20X2, Hook determines the fair value of the investment property to be $150,000, $80,000
respectively. Hook’s accounting policy is to measure investment properties at fair value. Which
one of the following journal entries is processed by Hook on 30 June 20X1?
A. No entry required
B. Dr. Investment properties/ Cr. Rental revenue $50,000
C. Dr. Investment properties/ Cr. Asset revaluation reserve $50,000
D. Dr. Investment properties/ Cr. Gain on revaluation (Profit or Loss) $50,000

10. If an entity uses part of a building for their own use, and rents the remainder. How should
this be treated?
A. All as investment property under IAS 40 – Investment Property

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 B. Account for separately under ‘IAS - 16 Property, Plant and Equipment’ and ‘IAS - 40
Investment Property’
C. All under IAS 16 – Property, Plant and Equipment
D. None of these

Exercise 2:

Valiant Ltd acquired an investment property (buildings) for cash on 1 July 20x6 at a cost of
$1.6 million. The property was valued on 30 June of each year that it was held, with the
following results:
Year Fair value on 30 June
20x7 $1,800,000
20x8 1,700,000
20x9 2,000,000
20x10 2,500,000
The property was sold on 30 June 20x11 for $2.6 million.
Required:
1. If the fair value model is chosen, prepares general journal entries from 1 July 20x6 to
30 June 20x11.
2. If the cost model is chosen, prepares general journal entries from 1 July 20x6 to 30
June 20x11. It is assumed that recoverable amount and fair value are the same, and depreciation
charged in each year is 10% of cost.

Exercise 3:

Co A. owns a building which it has been used its head office. In order to reduce cost, on 30
June 20x9 it moved its head office to one of its production enter and is now letting out its office
for possible rent or lease. Company decided to use fair value model to measure investment
property.
The building has the original cost on 1 January 20x0 at $250,000 with 50 year useful life. The
building has the fair value of $350,000 and $380,000 on 30 June 20x9 and 31 December 20x9,
respectively.
Required:
Explain how this appears in the financial statements of Co A. at 31 December 20x9.

Exercise 4:

Carter Property Ltd acquired an investment property on 1 July 20x6 at a cost of $1,400,000 and
sold it for $1,860,000 on 31 December 20x8. The fair value of the property was $1,562,000 on
30 June 20x7 and $1,633,000 on 30 June 20x8.

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Required:  
Show the general journal entries for this property on 1 July 20x6, 30 June 20x7, 30 June
20x8 and 31 December 20x8 if the fair value model is used.

Exercise 5:

Omega is an entity that owns three properties. All three properties were purchased on 1 October
20x4. Details of the purchase price and market values of the properties are as follows:
Assets Property 1 Property 2 Property 3
$000 $000 $000
Purchase price 15,000 10,000 12,000
Market value 30 September 20x5 16,000 11,000 13,500
Market value 30 September 20x6 17,000 9,000 14,500
Properties 1 and 2 are used by Omega as factories while property 3 is let to a non-related third
party at a commercial rent. Omega does not depreciate any of the properties on the basis that
they are valued at market values that are generally expected to increase over time.
Required:
1. Assess whether Omega’s policy of non-depreciation of properties 1, 2 and 3 is in
accordance with international financial reporting standards.
2. Show how the movements in the carrying amount of each property will be reflected in
the financial statements of Omega for the years ended 30 September 20x5 and 20x6. You can
assume that any relevant depreciation is immaterial.
Where necessary you should justify your treatment with reference to appropriate international
financial reporting standards. Where more than one treatment is permitted under international
financial reporting standards, you should show the impact of both treatments.

Exercise 6:

Durian Ltd. owns an office building which it uses for administrative purposes with a depreciated
historical cost of $2 million. At 1 July 20x5, it had a remaining life of 20 years. The company
adopts the revaluation model for its office building and records revaluations using the netting
method as well amortizes revaluation surplus annually. Indicators of impairment and/or reversal
of impairment existed at 30 June 20x6, 20x7 and 20x8.
The information below shows relevant asset measurements at various dates:
Year ended 30 June Fair value Cost of disposal Value-in-use
20x6 $1,700,000 $85,000 $1,550,000
20x7 $1,400,000 $80,000 $1,350,000
20x8 $1,400,000 $90,000 $1,300,000

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After a reorganisation on 1 January 20x9, this property was let to a third party and reclassified
as an investment property applying Durian’s policy of the fair value model. An independent
valuer assessed the property to have a fair value of $1.8 million at 1 January 20x9, which had
risen to $1.9 million at 30 June 20x10.
Required:
1. Prepare journal entries to record the transactions relating to the transfer on 1 July 20x5 to
30 June 20x10.
2. Prepare extracts from Durian’s Statement of Comprehensive Income and Statement of
Financial Position for the year ended 30 June 20x10 in respect to the above property.

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