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St. Paul University Philippines
Tuguegarao City, Cagayan 3500
ACT 103b: Intermediate Accounting 2
1st SEMESTER S.Y. 2021-2022
CHARLES KEVIN R. SIA
BSA-2
CHAPTER 22: INVESTMENT PROPERTY
ANSWERS:
Problem 22-3
Problem 22-4
Problem 22-5
Problem 22-6
Problem 22-7
Problem 22-8
Problem 22-9
1
2
A
B
A
B
A
D
A
B
Problem 22-10
Problem 22-14
Problem 22-15
3
4
5
1
2
C
D
A
C
C
C
D
Problem 22-3 (IFRS)
Robust Company purchased an investment property on January 1, 2019 at a cost of P4,000,000.
The property had a useful life of 20 years and on December 31, 2020 had a fair value of P4,800,000.
On December 31, 2020 the property was sold net proceeds of P4,500,000.
The entity used the cost model to account for the investment property.
What is the gain to be recognized for 2020 regarding the disposal of the investment property?
a.
b.
c.
d.
900,000
500,000
800,000
700,000
Solution:
Under the cost model, investment property is carried at its cost less any accumulated depreciation
and any impairment losses.Any change in fair value is not recognized.
Cost – January 1, 2019
4,000,000
Accumulative depreciation (4,000,000/20 x 2 years)
( 400,000)
Carrying amount – December 31, 2020
3,600,000
Sales price
Carrying amount – December 31, 2020
Gain on disposal
Problem 22-4 (IFRS)
4,500,000
3,600,000
900,000
Nonchalant Company owned three investment properties with the following details:
Initial
cost
Property 1
Property 2
Property 3
2,700,000
3,450,000
3,300,000
Fair value
December 31, 2020
Fair value
December 31, 2021
3,200,000
3,000,000
3,900,000
4,000,000
2,100,000
3,600,000
Each property was acquired in 2020 with a useful life of 10 years. The accounting policy is to use
the fair value model for investment property.
What is the gain or loss to be recognized for 2021?
a.
b.
c.
d.
900,000 loss
400,000 loss
650,000 gain
300,000 loss
Solution:
Under the fair value model, the investment property is carried at its fair value and the investment
is not depreciated.
The unrealized loss from the fair value change is analyzed below:
Total fair value – December 31, 2019
Total fair value – December 31, 2020
Decrease in value - unrealized loss
Property 1
Property 2
Property 3
Net loss from change in fair value
Fair value
12/31/2019
3,200,000
3,000,000
3,900,000
Fair value
12/31/2020
4,000,000
2,100,000
3,600,000
10,100,000
9,700,000
400,000
Gain (loss)
800,000
(900,000)
(300,000)
(400,000)
Problem 22-5 (IFRS)
Ingenuous Company acquired a building on January 1, 2020 for P9,000,000. At that date the
building had a useful life of 30 years.
On December 31, 2020 the fair value of the building was P9,600,000 and on December 31, 2021,
the fair value is P9,800,000.
The building was classified as an investment property and accounted for under the cost model.
What amounts should be carried in the statement of financial position and recognized in profit or
loss for 2021?
a.
b.
c.
d.
Carrying amount
8,400,000
9,000,000
9,800,000
8,700,000
Profit or loss
300,000 expense
No gain, no loss
200,000 gain
300,000 expense
Solution:
Cost – January 1, 2020
Accumulative depreciation (9,000,000/30 x 2 years)
Carrying amount – December 31, 2021
Depreciation expense (9,000,000/30)
9,000,000
( 600,000)
8,400,000
300,000
Problem 22-6 (IFRS)
Considerate Company has a single investment property which had an original cost of P5,800,000
on January 1, 2018.
On December 31, 2020 the fair value was P6,000,000 and on December 31, 2021 the fair value
was P5,900,000.
On acquisition, the property had a useful life of 40 years.
What is the expense recognized in profit or loss for 2021 under the fair value model and cost
model?
a.
b.
c.
d.
Fair value model
147,500
100,000
145,000
100,000
Cost model
145,000
145,000
100,000
147,500
Fair value model
Fair value - December 31, 2020
Fair value - December 31, 2021
Loss from change in fair value
Cost model
Depreciation expense for 2021 (5,800,000/40)
6,000,000
5,900,000
100,000
145,000
Problem 22-7 (IFRS)
Paradise Company’s accounting policy with respect to investment property is fair value model at
the end of each reporting period. One investment property had a fair value of P8,000,000 on
December 31, 2020.
The property had been acquired on January 1, 2020 for a total of P7,600,000, made up of
P6,900,000 paid to the vendor, P300,000 paid to the local authority as a property transfer tax and
P400,000 paid to professional advisers. The useful life of the property is 40 years.
What is the gain to be recognized for 2020 in respect of the investment property?
a.
b.
c.
d.
400,000
700,000
800,000
590,000
Solution:
Acquisition cost - January 1, 2020
Fair value - December 31, 2020
Gain from change in fair value
7,600,000
8,000,000
400,000
Problem 22-8 (IFRS)
On January 1,2020 Scholastic Company acquired a building to be held as investment property in
a remote location for P5,000,000. After initial recognition the entity measured the investment
property using the cost model because the fair value cannot be measured reliably.
On December 31, 2020, management assessed the useful life of the building at 20 years from the
date of acquisition and presumed the residual value to be nil because the fair value cannot be
determined reliably.
At year end, the entity declined an unsolicited offer to purchase the building for P6,500,000. This
is a one-time offer that is unlikely to be repeated in the foreseeable future.
What is the carrying amount of the building on December 31, 2020?
a.
b.
c.
d.
5,000,000
6,500,000
6,175,000
4,750,000
Solution:
Cost – January 1, 2020
Accumulative depreciation (5,000,000/20 x 1 year)
Carrying amount – December 31, 2020
5,000,000
( 250,000)
4,750,000
Problem 22-9 (IFRS)
On January 1, 2020, Wee Company acquired property consisting of ten identical freehold detached
houses each with separate legal title including the land on which it is built for P200,000,000, 20%
of which is attributable to the land. The units have a useful life of 50 years.
The following costs are also incurred on such date:
•
Nonrefundable transfer taxes not included
in the purchase price
20,000,000
•
Legal cost directly attributable to the acquisition
•
Reimbursement to the previous owner for
prepaying nonrefundable property taxes
for the six-month period ending June 30,2020
100,000
•
Advertising campaign
500,000
•
Operating function to celebrate new rental business
200,000
1,000,000
On June 30, 2020, the entity paid local property taxes of P200,000 for the year ending June 30,
2021.
Throughout 2020, the entity incurred repairs and maintenance of P120,000.
The entity used one of the ten units to accommodate the administration and maintenance staff.
The other nine units are rented out to independent parties under an operating lease.
On December 31, 2020, the fair value of each unit was reliably estimated at P25,000,000. The fair
value of the units can be measured reliably.
The accounting policy is to use the fair value model for investment property.
1. What is the initial measurement of the investment property?
a.
b.
c.
d.
198,900,000
198,000,000
176,800,000
180,000,000
Solution:
Purchase price (200,000,000 x 9/10)
Nonrefundable transfer taxes (20,000,000 x 9/10)
Legal cost (1,000,000 x 9/10)
Initial cost of investment property
180,000,000
18,000,000
900,000
198,900,000
2. What is the initial measurement of the land to be accounted for as property, plant and equipment?
a.
b.
c.
d.
4,400,000
4,420,000
4,000,000
4,430,000
Solution:
Purchase price (200,000,000 x 1/10 x 20%)
Nonrefundable transfer taxes (20,000,000 x 1/10 x 20%)
Legal cost (1,000,000 x 1/10 x 20%)
Initial cost of land
4,000,000
400,000
20,000
4,420,000
3. What is the initial measurement of the building to be accounted for as property, plant and
equipment?
a.
b.
c.
d.
17,690,000
17,600,000
17,680,000
16,000,000
Solution:
Purchase price (200,000,000 x 1/10 x 80%)
Nonrefundable transfer taxes (20,000,000 x 1/10 x 80%)
Legal cost (1,000,000 x 1/10 x 80%)
Initial cost of building
16,000,000
1,600,000
80,000
17,680,000
4. What is the gain from the increase in fair value of investment property for the current year?
a.
b.
c.
d.
51,100,000
27,000,000
45,000,000
26,100,000
Solution:
Fair value – December 31, 2020 (25,000,000 x 9 units)
Initial cost of the investment property
Increase in value – unrealized gain
5. What is the depreciation of the building for the current year?
a. 353,600
b. 320,000
c. 352,000
d. 353,800
Solution:
225,000,000
198,900,000
26,100,000
Depreciation for 2020 (17,680,000/50 years)
353,600
*The property taxes, advertising campaign, cost of an open function to celebrate new rental
business, and repairs and maintenance are expensed immediately when incurred.
Problem 22-10 (IFRS)
Rhino Company, a real estate entity, had a building with a carrying amount of P20,000,000 on
December 31, 2020.
The building was used as offices of the entity’s administrative staff.
On December 31, 2020, the entity intended to rent out the building to independent parties. The
staff will be moved to a new building purchased early in 2020.
On December 31, 2020, the original building had a fair value of P35,000,000.
On December 31, 2020, the entity also had land that was held for sale in the ordinary course of
business.
The land had a carrying amount of P10,000,000 and fair value of P15,000,000 on December 31,
2020.
On such date, the entity decided to hold the land for capital appreciation.
The accounting policy is to carry all investment property at fair value.
1. On December 31, 2020, what amount should be recognized in revaluation surplus as a result of
transfer of the building to investment property?
a. 20,000,000
b. 35,000,000
c. 15,000,000
d.
0
Solution:
Fair value building
Carrying amount of building
Revaluation surplus
35,000,000
20,000,000
15,000,000
2. On December 31, 2020, what amount should be recognized in profit or loss as a result of transfer
of the land to investment property?
a. 15,000,000
b. 10,000,000
c. 5,000,000
d.
0
Solution:
Fair value of land
Carrying amount of land
Gain on reclassification
15,000,000
10,000,000
5,000,000
Problem 22-14 (AICPA Adapted)
Marital Company has a P5,000,000 ordinary life insurance policy on the president. The policy year
and accounting year coincide.
The entity provided the following date for the year ended December 31, 2020.
Cash surrender value, January 1
Cash surrender value, December 31
Annual advance premium paid – January 1
Dividend received – July 1
245,000
270,000
100,000
15,000
The entity is the beneficiary under the life insurance policy. The insured died on January 2, 2021,
after the payment of annual premium of P100,000 on January 1, 2021.
What is the life insurance expense for 2020?
a. 100,000
b. 85,000
c. 60,000
d. 75,000
Solution:
Premium paid – January 1
Less: Dividend received - July 1
Increase in cash surrender value (270,000 - 245,000)
Life insurance expense for 2020
100,000
15,000
25,000
40,000
60,000
Problem 22-15 (AICPA Adapted)
Chain Company has a P5,000,000 life insurance policy on the president, of which Chain Company
is the beneficiary.
The entity provided the following information regarding the policy for the year ended December
31, 2020:
Cash surrender value, January 1
Cash surrender value, December 31
Annual advance premium paid – January 1
435,000
540,000
200,000
During the current year dividends of P30,000 were applied to increase the cash surrender value of
the policy.
What amount should be reported as life insurance expense for 2020?
a. 200,000
b. 125,000
c. 65,000
d. 95,000
Solution:
Premium paid - January 1
Less: Increase in cash surrender value (540,000 - 435,000)
Life insurance expense for 2020
200,000
(105,000)
95,000
*The dividends of P30,000 are not deducted anymore because it is already part of the increase in
cash surrender value.
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