IAS40 Tutorial 22 February 2024

Lovey Limited had its head-office building located in University Street in Thohoyandou. It
also owned a building nearby in Thohoyandou West that it rented out to students.

On 30 June 20X15, the fire completely destroyed the building in Thohoyandou West. Since
the students were valued tenants, Lovey Limited decided to lease out its head-office building
to students as a ‘replacement’.

Details relating to the head-office in University Street are as follows:

 Purchased on the 1 January 20X15 for R500 000 cash.

 Total useful life: 10 years (residual value is nil)
 Fair values: R700 000 on 30 June 20X15 and R720 000 on 31 December 20X15.
 It is not possible to sell or lease out this 80% of the building separately from the rest of
the building.

Lovey Limited uses:

 The fair value model to measure its investment properties; and

 The cost model to measure its property, plant and equipment.

Required:

1. Prepare the journal entries necessary for the financial year ended 31 December
20X15 regarding the asset so as to be in compliance with requirements of IFRS.
2. Disclosure in the financial statements of Lovey Limited for the year ended 31
December 20X15 so as to comply with IFRS.
NB: Don’t show comparative figures.
Suggested Solution

1. Journal Entries

01/01/20X15

Debit Credit

Office building (PPE) 500 000

Bank(A) 500 000

Purchase of head-office building (owner occupied)

30 June 20X15

Depreciation expense(E) 25 000

Accumulated depreciated: Building(A) 25 000

Depreciation (500 000- 0) /10 *6/12) = 25 000

Office building: Carrying amount 225 000

Revaluation surplus 225 000

Revaluation surplus of head office to fair value on date

of change of use (700 000 – (500 000 – 25 000) =225 000

Office building: Fair value (IP) 700 000

Office building: carrying amount (PPE) 700 000

Transfer of office building from PPE to IP on date of

change of use

Office building: Fair value (IP) 20 0000

Fair value adjustment on investment property (P/L) 20 000

Measurement of investment property to fair value at

year-end

2. LOVEY LIMITED

EXTRACT FROM SATEMENT OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20X15

Profit for the year extract before ordinary items

Depreciation 25 000
 Other comprehensive income

Fair value adjustment 20 000

LOVEY LIMITED

STATEMENT OF FINACIAL POSITION FOR THE YEAR ENDED 31 DECEMBER

20X15

Rand

ASSETS

Non-Current Assets

Investment Property 720 000