SEATWORK – Investment Property and Intangibles
35 points
For items 1-11, write TRUE if the statement is correct, otherwise write
FALSE.
1. IAS 40 applies to the measurement in a lessee's financial statements of
investment property interests held under a lease accounted for as a
finance lease.
2. IAS 40 applies to the measurement in a lessee's financial statements of
investment property interests held under a lease accounted for as a
finance lease and to the measurement in a lessor's (providing lease)
financial statements of investment property provided to a lessee
(receiving lease) under an operating lease.
3. Development involves application of research finding.
4. Expenditure during the research phase of a project may sometimes be
capitalized as an intangible asset.
5. Training costs of technicians used in research can be capitalized.
6. Systematic and Rational Allocation is the principle that best describes
the current method of accounting for research and development cost.
7. As a rule, computer software is classified as an intangible asset.
8. Computer software purchased for resale shall be treated as inventory.
9. A computer software purchased as an integral part of a computer-
controlled machine tool that cannot operate without the specific
software shall be treated as an intangible asset.
10. As one of the criteria of development expenditures in order to qualify
them for capitalization is that the entity must reasonably identify the
research cost incurred to bring the project to economic feasibility.
11. Design, construction and testing of preproduction prototype and model
are under research activities.
12. Under what circumstance can a lessee classify a leased property
interest as investment property if it is an operating lease?
a. Management believes it is more appropriate for the financial
statements.
b. The lessee uses a fair value model and the property would
otherwise meet the definition of an investment property.
c. The rents and capital appreciation created from the property are a
substantial source of the firm's revenues.
d. All of the above
13. Why is the building where a manufacturing company's factory is located
not considered investment property?
a. The cash flows generated from the factory production as a result
of the building is independent from the cash flows generated as
a result of other assets.
b. The cash flows generated from the factory production as a result
of the building is not independent from the cash flows generated
as a result of other assets.
c. Historically the company has not seen the value of the building
appreciate and does not expect it to in the future.
d. The company is planning on moving locations in the next 3
years.
14. Which of the following illustrates an investment property?
a. A Makati condo that is rented by a grocery store for capital
appreciation and rental
b. A building that operates and derives its cash flow from running
as a hotel
c. A building that operates and derives its cash flow from running
as a restaurant
d. A piece of land that is used as a farm
15. Which of the following statements is true with regards to an investment
property?
a. An investment property generates cash flows largely
independently of the other assets held by an entity
b. The value in use of investment property is significantly higher
than of owner-occupied property
c. An investment property unlike owner-occupied property shall not
be depreciated over its useful life
d. An investment property unlike owner-occupied property shall
always be measured at its historical cost
PROBLEMS – 20 POINTS
1. The following T-account represents the transactions affecting the
balance of the Patent account:
Patent
1/1/2016 P 500,000
1/1/2018 240,000
1/1/2019 200,000
1/1/2020 100,000 P 1,040,000 12/31/2016
Additional information:
 The balance on January 1, 2016 reflects the amount debited to the
account when it acquired a patent from unrelated company for
P500,000. Rex estimates that the patent has a remaining useful life of
10 years.
 On January 1, 2018, Rex Co. debited the patent account when it
acquired a competitive patent from Dauz Corp for P240,000 in order to
protect the old patent. The competitive patent has a remaining legal life
and useful life of 16 years.
 On January 1, 2019, Rex Co. debited the patent account when it
acquired a related patent from Banggawan Corp. for P200,000. The
related patent extended the useful life of the old and competitive
patents for 20 years.
 On January 1, 2020, Rex Co. debited the patent account when it
incurred litigation costs of P100,000 in an unsuccessful defense of the
patents held.
 No amortization has yet been recognized by the company.
Compute for the following: (10 points)
1. Amortization in 2016. (1 point)
2. Amortization in 2018. (1 point)
3. Carrying value of the Patent, December 31, 2018. (2 point)
4. Amortization in 2019. (2 point)
5. Loss on Patent written off in 2020. (1 point)
6. Provide for a single compound adjusting entry on December
31, 2020. (3 points)
2. Deena, Inc. owns a building purchased on January 1, 2016 for P100
million. The building was used as the company's head office. The
building has an estimated useful life of 25 years. In 2020, the company
transferred its head office and decided to lease out the old building.
Tenants began occupying the old building by the end of 2020. On
December 31, 2020, the company reclassified the building as
investment property to be carried at fair value. The fair value on the
date of reclassification was P85 million. The reclassification of the asset
will result into the recognition of a profit or loss item equal to________.
(2)
3. On January 2, 2019, Finnick Company made a test of impairment on
one of its buildings carried as plant asset. The test on impairment
revealed a recoverable value of P8,250,000 on that building. The
carrying value of this building as of January 2, 2019 is P12,000,000
with a remaining useful life of 10 years.
On January 1, 2021, Finnick Company decided to convert this building
into an investment property that is to be carried at fair value. The cost
of converting the building is insignificant but as a result of the change in
the usage, the fair market value of the building was reliably valued at
P10,500,000. The reclassification of the asset will result into the
recognition of a profit or loss item equal to________. (2)
4. MODULATE Co. has the following assets.
Vacant building to be leased out under operating lease, 4,000,000
Building being constructed for TO ADJUST, Inc., 800,000
Building under construction to be used as office, 1,600,000
Building under construction to be rented out under operating lease,
400,000
 Building rented out to MODULATE’s employees who pay rent at market
rates, 3,200,000
Office building awaiting disposal, 200,000
How much is the total investment property? (2)

5. On January 1, 20x1, NURTURE REAR Co. acquired a building with an

estimated useful life of 10 years and residual value of P400,000 for a
total cost of P4,000,000. The fair value of the building on January 1,
20x1 is P4,800,000 while the fair value on December 31, 20x1 is
P5,200,000. NURTURE estimates that if the building is sold currently
on December 31, 20x1, costs to sell amount to P200,000. NURTURE
uses the straight-line method in depreciating its PPE. NURTURE uses
the fair value model for its investment properties. Give the adjusting
entry on December 31, 20x1. (2)

6. PERIODIC REGULAR Co. acquired a building on January 1, 20x1 for a

total cost of P24,000,000 and classified it as investment property.
PERIODIC Co. uses the fair value model for its investment property. On
January 1, 20x5, when the carrying amount of the building is
P16,000,000, the elevator in the building was replaced for a total cost
of P3,200,000. It is impracticable to determine the fair value of the
replaced part. The fair value of the building on December 31, 20x5 is
P17,200,000. How much is the loss recognized during the year? (2)