IAS 40

Investment Properties

Question 1
A business owns a building which it has been using as a head office. In order to reduce costs, on
30 June 2009 it moved its head office functions to one of its production centres and is now
letting out its head office. Company policy is to use the fair value model for investment property.
The building had an original cost on 1 January 2010 of TZS 250,000 and was being depreciated
over 50 years. At 31 December 2009 its fair value was judged to be TZS 350,000.
Required: How will this appear in the financial statements at 31 December 2009?

Question 2
Rich Co owns a piece of land. The directors have not yet decided whether to build a factory on it
for use in its business or to keep it and sell it when its value has risen.
Would this be classified as an investment property under IAS 40?

Question 3 ACCA 2013 June (Change in use)

(a) The accounting treatment of investment properties is prescribed by IAS 40 Investment
Property.

Required:
(i) Define investment property under IAS 40 and explain why its accounting treatment is
different from that of owner-occupied property;
(ii) Explain how the treatment of an investment property carried under the fair value model
differs from an owner-occupied property carried under the revaluation model.

(b) Speculate owns the following properties at 1 April 2012:

Property A: An office building used by Speculate for administrative purposes with a depreciated
historical cost of $2 million. At 1 April 2012 it had a remaining life of 20 years. After a
reorganisation on 1 October 2012, the property was let to a third party and reclassified as an
investment property applying Speculate‟s policy of the fair value model. An independent valuer
assessed the property to have a fair value of $2·3 million at 1 October 2012, which had risen to
$2·34 million at 31 March 2013.
Property B: Another office building sub-let to a subsidiary of Speculate. At 1 April 2012, it had a
fair value of $1·5 million which had risen to $1·65 million at 31 March 2013.

Required:
Prepare extracts from Speculate‟s entity statement of profit or loss and other comprehensive
income and statement of financial position for the year ended 31 March 2013 in respect of the
above properties. In the case of property B only, state how it would be classified in Speculate‟s
consolidated statement of financial position.
Note: Ignore deferred tax.

Question 4
ABC Ltd. constructed a mega shopping mall in Mwanza. Construction completed on 31
December 2015. According to the company‟s engineering department the computed total cost of
the construction of the shopping mall was TZS 100 billion. An independent valuation expert was
used by the company to fair value the shopping mall on an annual basis. According to the fair
valuation expert the fair values of the shopping mall at the end of 2016 and at each subsequent
year-end thereafter were:
2016 TZS 100 billion
2017 TZS 120 billion
2018 TZS 125 billion
2019 TZS 115 billion
The independent valuation expert was of the opinion that the useful life of the shopping mall was
10 years and its residual value was TZS 10 billion.

Required:
What would be the impact on the profit and loss account of the company if it decides to treat the
shopping mall as an investment property under IAS 40.
a) Using the “fair value model” and
b) Using the “cost model”
(Since the rental income for the shopping mall would be the same under both the options, for the
purpose of this exercise do not take into consideration the impact of the rental income from the
shopping mall on the next profit or loss for the period).

IAS 2
Inventory

QUESTION 1:
Following information is available regarding cost of inventory.
TZS

Invoice price (including sales tax) - 1000 units 11,150

Cost of material 8,250

Income Tax paid at import stage 800

Custom duty 600

Sales Tax (refundable) 2,000

Transport charges 500

Material handling charges 400

Store rent 300

Discounts allowed 250

Indirect labour 200

Variable overhead 130

Depreciation 520

Selling expenses 220

Maintenance of factory equipment 300

Designing charges 550

 Material wasted 250

From the data given above , compute the value of inventory in hand (800 units) in accordance
with the requirements of IAS 2

At what value should each of the above be included in the inventory of ABC Co.
QUESTION 2:
(Inventory valuation)
Neil paid $3 per unit for the raw materials of its products. To complete each unit incurred $2 per
unit in direct labour. Production overheads for the year based on normal output of 12,000 units
was $72,000. Due to industrial action only 10,000 units were produced and 1,000 units were in
inventory at the end of the year. As a result of the industrial action some units were badly stored
and became damaged. It‟s is estimated that 200 of the units will now only be sold for $12 each
after minor repairs of $2 each.

What figure for closing inventory would be shown in the Statement of Financial Position?
QUESTION 3:
On 1 April 2015, a company‟s inventory included 10,000 items which had been acquired for
Tshs 140 per item. Purchases and sales of the items during the year to 31 March 2016 were as
follows:
Purchases Number of Cost per item sales Number of
items bought items sold
2-Jul-15 10,000 142 26-Aug-15 16,000
2-Oct-15 6,000 146 5-Nov-15 7,000
22-Jan-16 15,000 150 12-Mar-16 17,000

Required
(a) Calculate the cost of bricks sold during the year and the cost of inventory of bricks remaining
at 31 March 2016, using
i. First-in, First-out (FIFO)
 ii. Last-in, First-out (LIFO)
iii. Weighted average cost (AVCO)
(b) Which of these three methods should the company use?

QUESTION 4:
Kidz Party & Co. (KPC) manufactures and sells toys. Following information is available
regarding four of its inventory items as on 31 December 2017:
Items Units Cost per unit (TZS.) Normal selling price per
unit (TZS.)
Toy cars 10,000 1,250 1,200
Doll houses 5,000 1,800 2,700
Stuffed toys 1,850 1,200 1,900
Minion costumes 870 1,500 2,500

Following information is also available:

i. A sales order for 3,000 toy cars @ TZS. 1,100 per unit is in hand. The remaining units can be
sold at normal selling price after incurring selling cost of TZS. 150 per unit.
ii. Doll houses include 1,000 defective units with no scrap value. 20% of the remaining doll
houses are damaged and can be sold at 50% of cost.
iii. Stuffed toys costing TZS. 420,000 were accidentally damaged and are beyond repair. KPC
plans to sell these toys as scrap. Proceeds from such sale are estimated at TZS 175,000 and
the sale would require transportation cost of TZS 6,300.
iv. All minion costumes have manufacturing faults and can be sold in present condition at TZS
1,350 per unit. However, 60% of the units can be rectified at a cost of TZS. 200 per unit after
which they can be sold at TZS. 1,600 per unit.

Required:
Calculate the amount at which above inventory items should be carried as on 31 December 2017
in accordance with IAS 2 „Inventories‟.