RIZAL TECHNOLOGICAL UNIVERSITY

Cities of Mandaluyong and Pasig

LESSON 3

INVESTMENT PROPERTIES

1. Nature, Recognition and Measurement of Investment Properties

2. Transfers from or to Investment Property
3. Completion of Self-Constructed or Developed Investment Property
4. Replacement Parts

Overview

This module is prepared for the students to understand the nature of

investment properties.
This module introduces the nature of investment properties, types and
classification, initial recognition and measurement, subsequent measurement
and reclassification, derecognition and presentation in the financial
statements.
This module will cover a brief discussion of the theory and standard
behind the topic, exercises and practice problem the cover the said topic.

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Study Guide

This module is designed for the students to understand provisions,

contingencies and other liabilities. This module includes:
1. Topic Discussions - to be read by the students to fully understand the
topic.
2. Assessment – to be accomplished by the students after the
discussion to test their skills and understanding to the subject matter.
3. Assignment – activity to be done by students to be submitted to the
instructor. This is to reinforce or advance the student’s learning. It is
relevant to the past, current, and future lessons.
To complete the requirements of this module, the students are required to:
1. Read and understand the topic discussion and the guided exercises
2. Accomplish the assessment.
3. Accomplish the assignment due on next meeting.

Learning Outcomes

At the end of the discussion, the students are expected to:

1. Describe and understand the nature of investment properties and
identify the items to be included in the account title “Investment
Properties”.
2. Explain different classification issues for investment properties.
3. Describe the initial recognition and measurement, subsequent
recognition and measurement, derecognition and financial statements
presentation of investment properties

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Topic Presentation

INVESTMENT PROPERTIES

Under IAS 40, investment property is property (land or a building—or part of a

building—or both) held (by the owner or by the lessee as a right-of-use asset) to
earn rentals or for capital appreciation or both, rather than for use in the
production or supply of goods or services or for administrative purposes or sale in the
ordinary course of business.

Examples of investment properties:

1. Land held for long-term capital appreciation rather than for short-term sale in the
ordinary course of business.
2. Land held for a currently undetermined future use.
Note: If an entity has not determined that it will use the land as owner-occupied
property or for short-term sale in the ordinary course of business, the land is
regarded as held for capital appreciation.
3. A building owned by the entity (or a right-of-use asset relating to a building held
by the entity) and leased out under one or more operating leases.
4. A building that is vacant but is held to be leased out under one or more operating
leases.
5. Property that is being constructed or developed for future use as investment
property.

Items excluded as investment properties:

Items Treatment
1. Property intended for sale in the ordinary course of Inventories
business or in the process of construction or
development for such sale, for example, property
acquired exclusively with a view to subsequent
disposal in the near future or for development and
resale.
2. Owner-occupied property, including (among other Either:
things) property held for future use as owner- a. Property, Plant and
occupied property, property held for future Equipment
development and subsequent use as owner- b. Right-of-use Asset under
occupied property, property occupied by employees IFRS 16
(whether or not the employees pay rent at market c. Noncurrent asset held for
rates) and owner-occupied property awaiting sale under IFRS 5 (if
disposal. there is intent to sell)
3. Property that is leased to another entity under a Not reported in the books of
finance lease the company

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Property that is partly investment and partly owner-occupied

Some properties comprise a portion that is held to earn rentals or for capital
appreciation and another portion that is held for use in the production or supply of
goods or services or for administrative purposes. IAS 40 provides guidance on the
interpretation on whether the property will be classified as investment property or
owner-occupied property:

1. If these portions could be sold or leased out separately:

a. Investment property – those portions that are rented out or for capital
appreciation.
b. Owner-occupied property – those portions that are used by the entity for
administrative purposes

2. If these portions cannot be sold or leased out separately:

a. Investment property – if owner-occupied portions are insignificant
b. Owner-occupied property – if owner-occupied portions are significant

Ancillary Services
In some cases, an entity provides ancillary services to the occupants of a property it
holds. Ancillary services include security and maintenance services to the property
and other administrative services and functions. If the entity provides ancillary
services to the occupants of the property held by the entity, the appropriateness of
classification as investment property is determined by the significance of the services
provided.

1. Investment property – if ancillary services are relatively insignificant

component of the arrangement as a whole (for instance, the property owner
supplies security and maintenance services to the lessees)
2. Owner-occupied property – if ancillary services are relatively significant
component of the arrangement as a whole (for instance, in case of an owner-
managed hotel, where services provided to guests are significant to the
arrangement as a whole)

It may be difficult to determine whether ancillary services are so significant that a

property does not qualify as investment property. For example, the owner of a hotel
sometimes transfers some responsibilities to third parties under a management
contract. The terms of such contracts vary widely. At one end of the spectrum, the
owner’s position may, in substance, be that of a passive investor. At the other end of
the spectrum, the owner may simply have outsourced day-to-day functions while
retaining significant exposure to variation in the cash flows generated by the
operations of the hotel.

Judgement is needed to determine whether a property qualifies as investment

Property. An entity develops criteria so that it can exercise that judgement
consistently in accordance with the definition of investment property.

INTRACOMPANY RENTALS
Property rented to a parent, subsidiary or fellow subsidiary is accounted as follows:
1. Consolidated financial statements – it is an owner-occupied property from
the perspective of the group

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2. Separate financial statements – it is accounted as investment property by

the lessor if the definition of the investment property is met
RECOGNITION AND MEASUREMENT OF INVESTMENT PROPERTY

INITIAL RECOGNITION OF INVESTMENT PROPERTIES

An owned investment property shall be recognized as an asset when, and only when:
a. it is probable that the future economic benefits that are associated with the
investment property will flow to the entity; and
b. the cost of the investment property can be measured reliably

INITIAL MEASUREMENT OF INVESTMENT PROPERTIES

An owned investment property shall be measured initially at its cost, including

transaction costs. The cost of a purchased investment property comprises purchase
price and any directly attributable expenditure.

Transaction costs include directly attributable costs such as property transfer taxes,
legal fees, professional fees and other transaction costs.

The cost of an investment property is not increased by:

a. start-up costs (unless they are necessary to bring the property to the
condition necessary for it to be capable of operating in the manner intended
by management)
b. operating losses incurred before the investment property achieves the
planned level of occupancy, or
c. abnormal amounts of wasted material, labor or other resources incurred in
constructing or developing the property.

ACQUISITION OF INVESTMENT PROPERTIES

Investment properties, like property, plant and equipment can be acquired on several
ways, namely:
1. Cash basis
2. Acquisition on account
3. Deferred Settlement Terms/Installment basis
4. Issuance of share capital
5. Issuance of bonds payable
6. Exchange
7. Donation
8. Government grant
9. Construction

1. Acquisition on cash basis

If the asset was acquired on a cash basis, the amount to be capitalized is equal to
the cash price or cash equivalents paid in the acquisition date plus directly
attributable costs such as freight, installation costs and other costs necessary in
bringing the asset to the location and condition for the intended use.

For acquisition of several assets that are purchased at its lump sum price or basket
price, the capitalizable cost should be allocated based on their relative fair values.

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2. Acquisition on account

When an is acquired on account subject to a cash discount, the cost of the asset is
equal to the invoice price minus the discount, regardless of whether the discount is
taken or not. Two methods may be used in recording:
a. Gross method – on the acquisition date, the property, plant and equipment is
recorded at invoice price before deducting the cash discount. On the payment
date, the cash discount is deducted from the invoice price by a credit to property,
plant and equipment.

b. Net method - on the acquisition date, the property, plant and equipment is
recorded at invoice price net of cash discount. This is the preferable approach
since PAS 16 requires recording of the property, plant and equipment at the
cash price equivalent at the recognition date (i.e., the acquisition date)

3. Acquisition on installment basis

When payment for item of property, plant and equipment is deferred beyond normal
credit terms, the cost of property, plant and equipment is:

a. If there is available cash price – the property, plant and equipment must be
recorded at cash price or cash equivalent paid at the acquisition date. The
difference between the cash price equivalent and the total payment is
recognized as interest expense over the period of credit unless such interest is
recognized in the carrying amount of the item in accordance with PAS 23
Borrowing Costs.

b. No available cash price - the property, plant and equipment must be recorded at
an amount equal to present value of all payments using an implied/imputed
interest rate.

4. Acquisition by issuance of share capital

According to PFRS 2, for equity-settled share-based payment transactions, the entity

shall measure the goods or services received, and the corresponding increase in
equity, directly at fair value of the goods or services rendered, unless that fair value
cannot be estimated reliably.

If the entity cannot estimate reliably the fair value of the goods or services, received
the entity shall measure their value, and the corresponding increase in equity,
indirectly, by reference to the fair value of the equity instruments granted.

In conclusion, when an entity acquires property, plant and equipment by issuing

shares of stocks, it must be recorded at an amount equal to the following in the order
of priority:
a. Fair value of property received
b. Fair value of the shares issued
c. Par Value of the shares issued

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5. Acquisition by issuance of bonds payable

According to PAS 16, The cost of an item of property, plant and equipment is the
cash price equivalent at the recognition date.
According to PFRS 9, the fair value of a financial instrument at initial recognition is
normally the transaction price. However, if part of the consideration is given or
received is for something other than the financial instrument, an entity shall measure
the fair value of the instrument.

In conclusion, when an entity acquires property, plant and equipment by issuing

bonds payable, it must be recorded at an amount equal to the following in the order
of priority:
a. Fair value of bonds payable issued
b. Fair value of the property received
c. Face value of the bonds payable issued

6. Acquisition by exchange transaction

One or more items of property, plant and equipment may be acquired in exchange for
a non-monetary asset or assets, or a combination of monetary and non-monetary
assets. The cost of such an item of property, plant and equipment is measured at fair
value unless:

a. The exchange transaction lacks commercial substance or

b. The fair value of neither the asset received, nor the asset given up is reliably
measurable
Commercial Substance
Commercial substance is defined as the event or transaction causing the cash flows
of the entity to change significantly by the reason of exchange.

An entity determines whether an exchange transaction has commercial substance by

considering the extent to which its future cash flows are expected to change as a
result of the transaction. An exchange transaction has commercial substance if:

a. the configuration (risk, timing and amount) of the cash flows of the asset
received differs from the configuration of the cash flows of the asset transferred;
or
b. the entity-specific value of the portion of the entity’s operations affected by the
transaction changes as a result of the exchange; and
c. the difference in (a) or (b) is significant relative to the fair value of the assets
exchanged.

Exchange with Commercial Substance

If a property is acquired in an exchange, the cost of property is equal to the following:
No cash is involved Cash is involved
Record the asset at the following order Record the asset at:
of priority:
1. Fair market value of the property Payor: Fair value of the asset given
given plus cash payment (in effect, this is the
2. Fair market value of the property fair value of the asset received)

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received
3. Cost or book value of the property Recipient of cash: Fair of the asset
given given minus cash payment (in effect,
this is the fair value of the asset
received)

Gain or loss on exchange is fully recognized when the exchange has commercial
substance.
Exchange without Commercial Substance

If the exchange transaction lacks commercial substance, the acquired item of

property, plant and equipment is measured at the carrying amount of the asset given.
Any cash involved in the exchange transaction on the part of the payor is added and
deducted from carrying amount on the part of the recipient.

No gain or loss on exchange is recognized when the exchange lacks commercial

substance.

7. Acquisition by donation

When an entity acquires property, plant and equipment through donation, the asset is
recorded at the fair value when received or receivable considering the source of the
donated asset:

a. Donation from a Shareholder

 Donations received from shareholders shall be recorded at the fair value
with a credit to Donated Capital.
 Expenses incurred in connection with donation such as payment for
expenses related to transfer of title to the entity, transfer taxes, legal fees
and registration fees shall be deducted from donated capital.
 Directly attributable costs incurred subsequently on the donated asset to
bring the asset to its intended location and condition shall be capitalized.

b. Donation from a Non-shareholder

 Donations received from non-shareholders are generally considered as
subsidies and shall be recorded at the fair value and recognized either as
income or a liability account until the restrictions are met and will be
considered as income.

8. Acquisition through government grant

When an entity acquires an asset through government grants, including

non-monetary grants at fair value, under IAS 20, it shall not be recognized until there
is reasonable assurance that:
a. the entity will comply with the conditions attaching to them; and
b. the grants will be received.

9. Acquisition by construction

When an entity constructs an asset that is classified property, plant and equipment,
the cost of self-constructed asset shall include:

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1. Direct cost of materials

2. Direct cost of labor
3. Indirect costs and overhead specifically identifiable or traceable to the
construction.

SUBSEQUENT MEASUREMENT OF INVESTMENT PROPERTIES

After initially recognizing the investment property at cost. An entity shall choose
either of the following models as the accounting policy and shall apply that policy to
all the investment property:
1. Cost model – the investment property is carried at cost less any accumulated
depreciation and any accumulated impairment losses.
2. Fair value model – the investment property is carried at fair value.

COST MODEL
After initial recognition, an entity that chooses the cost model shall measure
investment property:
a. in accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations if it meets the criteria to be classified as held for sale
(or is included in a disposal group that is classified as held for sale);
b. in accordance with IFRS 16 if it is held by a lessee as a right-of-use asset and
is not held for sale in accordance with IFRS 5; and
c. in accordance with the requirements in IAS 16 for the cost model in all other
cases

FAIR VALUE MODEL

After initial recognition, an entity that chooses the fair value model shall measure all
of its investment property at fair value.
Fair Value
Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date. An entity determines fair value without any deduction for transaction costs it
may incur on sale or other disposal.

A gain or loss arising from a change in the fair value of investment property shall be
recognized in profit or loss for the period in which it arises.

In determining the carrying amount of investment property under the fair value model,
an entity does not double-count assets or liabilities that are recognized as separate
assets or liabilities. For example:

a. equipment such as lifts or air-conditioning is often an integral part of a

building and is generally included in the fair value of the investment property,
rather than recognized separately as property, plant and equipment.
b. if an office is leased on a furnished basis, the fair value of the office generally
includes the fair value of the furniture, because the rental income relates to
the furnished office. When furniture is included in the fair value of investment
property, an entity does not recognize that furniture as a separate asset.

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c. the fair value of investment property excludes prepaid or accrued operating

lease income, because the entity recognizes it as a separate liability or asset.
d. the fair value of investment property held by a lessee as a right-of-use asset
reflects expected cash flows (including variable lease payments that are
expected to become payable). Accordingly, if a valuation obtained for a
property is net of all payments expected to be made, it will be necessary to
add back any recognized lease liability, to arrive at the carrying amount of the
investment property using the fair value model.

Inability to measure fair value reliably

There is a rebuttable presumption that an entity can reliably measure the fair value of
an investment property on a continuing basis.
1. At Initial Recognition
a. In exceptional cases, there is clear evidence when an entity first acquires an
investment property (or when an existing property first becomes investment
property after a change in use) that the fair value of the investment property is
not reliably measurable on a continuing basis. If an entity determines that the
fair value of an investment property under construction is not reliably
measurable but expects the fair value of the property to be reliably
measurable when construction is complete, it shall measure that investment
property under construction at cost until either its fair value becomes reliably
measurable or construction is completed (whichever is earlier).
b. If an entity determines that the fair value of an investment property (other than
an investment property under construction) is not reliably measurable on a
continuing basis, the entity shall measure that investment property using the
cost model in IAS 16 for owned investment property or in accordance with
IFRS 16 for investment property held by a lessee as a right-of-use asset. The
residual value of the investment property shall be assumed to be zero. The
entity shall continue to apply IAS 16 or IFRS 16 until disposal of the
investment property.
c. All other investment property shall be measured at fair value.

2. At Subsequent Recognition
If an entity has previously measured an investment property at fair value, it shall
continue to measure the property at fair value until disposal (or until the
property becomes owner-occupied property or the entity begins to develop the
property for subsequent sale in the ordinary course of business) even if
comparable market transactions become less frequent or market prices
become less readily available.

SUMMARY OF ACCOUNTING TREATMENT UNDER COST MODEL AND FAIR VALUE

MODEL
Financial Cost Model Fair Value Model
Statement
1. Statement of Investment property is Investment property is carried at fair
Financial carried at cost less value
Position accumulated depreciation
and accumulated
impairment losses
2. Statement of Depreciation expense and Increase or decrease in fair value:

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Comprehensiv impairment loss, if any Fair value at reporting date xx

e Income Less: Fair value, previous reporting
date (xx)
Gain (loss) on change in fair value xx

TRANSFERS OF INVESTMENT PROPERTIES

An entity shall transfer a property to, or from, investment property when, and only
when, there is a change in use.

A change in use occurs when the property meets, or ceases to meet, the definition of
investment property and there is evidence of the change in use. In isolation, a
change in management’s intentions for the use of a property does not provide
evidence of a change in use.
Examples of evidence of a change in use include:
a. commencement of owner-occupation, or of development with a view to
owner-occupation, for a transfer from investment property to owner-occupied
property;

b. commencement of development with a view to sale, for a transfer from

investment property to inventories;

c. end of owner-occupation, for a transfer from owner-occupied property to

investment property; and

d. inception of an operating lease to another party, for a transfer from

inventories to investment property.

Accounting for Transfers of Investment Properties

1. Transfers to and from Investment Property – Cost Model
When an entity uses the cost model, transfers between investment property,
owner-occupied property and inventories do not change the carrying amount
of the property transferred and they do not change the cost of that property for
measurement or disclosure purposes.
2. Transfers from Investment Property – Fair Value Model
For a transfer from investment property carried at fair value to owner-occupied
property or inventories, the property’s deemed cost shall be its fair value at the
date of change in use.
3. Transfers from Property, Plant and Equipment to Investment Property – Fair
Value Model
If an owner-occupied property becomes an investment property that will be
carried at fair value, an entity shall apply IAS 16 for owned property and IFRS 16
for property held by a lessee as a right-of-use asset up to the date of change in
use.

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The entity shall treat any difference at that date between the carrying amount of
the property in accordance with IAS 16 or IFRS 16 and its fair value in the same
way as a revaluation in accordance with IAS 16.
Up to the date when an owner-occupied property becomes an investment
property carried at fair value, an entity depreciates the property and recognizes
any impairment losses that have occurred.
At the date of reclassification, the entity treats any difference at that date between
the carrying amount of the property and its fair value as follows:
1. Any resulting decrease in the carrying amount of the property is recognized
in profit or loss.
However, to the extent that an amount is included in revaluation surplus
for that property, the decrease is charged against that revaluation
surplus.
2. Any resulting increase in the carrying amount is treated as follows:
a. to the extent that the increase reverses a previous impairment loss for
that property, the increase is recognized in profit or loss.

The amount recognized in profit or loss does not exceed the amount
needed to restore the carrying amount to the carrying amount that would
have been determined (net of depreciation) had no impairment loss
been recognized.

b. Any remaining part of the increase is credited directly to equity in

revaluation surplus. On subsequent disposal of the investment property,
the revaluation surplus included in equity may be transferred to retained
earnings.
The transfer from revaluation surplus to retained earnings is not made
through profit or loss.

4. Transfers from Property, Plant and Equipment to Investment Property – Fair

Value Model

For a transfer from inventories to investment property that will be carried at fair
value, any difference between the fair value of the property at that date and its
previous carrying amount shall be recognized in profit or loss.

The treatment of transfers from inventories to investment property that will be

carried at fair value is consistent with the treatment of sales of inventories.

SUMMARY OF ACCOUNTING FOR TRANSFERS TO OR FROM INVESTMENT

PROPERTIES
Item New Carrying Gain or loss on transfer
Amount
1. Transfers to and from Previous carrying No gain or loss on transfer is
investment using cost amount recognized.
model
2. Transfers from Fair value on date of Difference between the fair value at
investment property transfer the date of transfer and fair value on
carried at fair value the previous reporting period

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model
3. Transfers to investment
property that will be
carried using fair value
method:
a. From owner- Fair value on date of
No gain or loss on transfer is
occupied property transfer recognized. Account the change of the
owner-occupied property using IAS 16
up to the date of transfer
b. From inventories to Fair value on date of Fair value at the date of transfer less
investment property transfer the carrying amount on previous
reporting period (that is LCNRV)
FINANCIAL STATEMENTS PRESENTATION OF INVESTMENT PROPERTIES

Investment properties are presented in the statement of financial position as one line
item under the non-current section.

DERECOGNITION

An investment property shall be derecognized (eliminated from the statement of

financial position) on:
a. Disposal; or
b. when the investment property is permanently withdrawn from use; and
c. no future economic benefits are expected from its disposal.

Gains or losses arising from the retirement or disposal of investment property shall
be determined as the difference between the net disposal proceeds and the
carrying amount of the asset and shall be recognized in profit or loss in the period
of the retirement or disposal.

REPLACEMENT PARTS

An entity recognizes in the carrying amount of an asset the cost of replacement for
part of an investment property, it derecognizes the carrying amount of the replaced
part.

1. Cost Model

For investment property accounted using cost model, a replaced part may or
may not be a part was depreciated separately.

If it is not practicable for an entity to determine the carrying amount of the

replaced part, it may use the cost of the replacement as an indication of
what the cost of the replaced part was at the time it was acquired or
constructed.

2. Fair Value Model

Under the fair value method, the fair value of the investment property may
already reflect that the part to be replaced has lost its value.

An alternative, to reducing the fair value of the replaced part, when it is not
practical to do so, is to include the cost of the replacement in the carrying

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amount of the asset and then to reassess the fair value, as would be required
for additions not involving replacement.

PROBLEM 1:

On December 31, 2021, the following data was provided during the financial
statement preparation of PERALTA CORP. and its subsidiaries consolidated financial
statements:

Item Amount
1. Farming land that was purchased for its investment Php 800,000
potential. Planning permission has not been obtained
for building constructions of any kind.
2. A building that is leased to an associate under 1,260,000
operating lease
3. Factory building which due to decline in activity 500,000
because of COVID-19 pandemic, is no longer needed
and is now being held for immediate sale in its present
condition and the sale is highly probable.
4. A building being constructed on behalf of SANTIAGO 1,000,000
CORP.
5. A property that is in the process of construction for sale 950,000
6. A property intended for sale in the ordinary course of 450,000
business
7. Owner-occupied properties 1,600,000
8. Buildings occupied by employees. The employees pay 760,000
rent on the building they occupy.
9. Buildings occupied by employees. The employees do 240,000
not pay market rent on the building they occupy.
10. A new machine leased by PERALTA under operating 530,000
lease
11. A building that is being constructed for future use as 870,000
administration building.
12. A building that is held under mixed use; half of it is 1,720,000
owner-occupied and the other half is to earn rentals.
13. A building wherein significant security and maintenance 960,000
services are provided to occupants
14. Land and building leased to a subsidiary of PERALTA 2,100,000
15. An equipment that is leased to a third party under 1,110,000
finance lease

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Required: Compute for the following:

1. Investment properties
2. Property, plant and equipment
3. Inventories

PROBLEM 2:

HOLT INC. completed the construction of a hotel with a swimming pool at a cost of
Php105,000,000 at January 1, 2021. The estimated useful life of the hotel is 30 years
and HOLT uses the cost model in accounting for its fixed assets.

A. Assume that HOLT INC. provides security services for its guest belongings as
part of the service it provides, what amount should HOLT report as
investment property in its statement of financial position as of December 31,
2022?

B. Assume that HOLT INC. is an owner-managed hotel, what amount should

HOLT report as investment property in its statement of financial position as of
December 31, 2025?

PROBLEM 3:

LINETTI INC. started its construction of condominium in Tondo, Manila. The

management of LINETTI INC. decided that the business purpose of constructing the
condominium is to hold this property for purposes of earning rentals to potential
tenants in Manila City. LINETTI has no plan on selling any condominium units on the
building under construction once the property is completed.

The construction of the condominium was completed on January 1, 2021 and it was
available for use on February 1, 2021. The cost of construction of the condominium
are as follows (all paid in cash):
Materials, labor and overhead 40,000,000
Borrowing costs specifically identified on the construction 2,000,000
Driveway, parking bay and safely lighting 8,000,000
Architect and engineer’s fee 5,000,000
Savings on construction 10,000,000
Cost of changes during construction to make the
condominium more energy efficient 3,000,000
Marketing fee for the promotion of the condominium 1,000,000

The useful life of the condominium is 25 years and the residual value is Php
5,000,000.

After the construction of the condominium, an independent appraiser provided the

following fair values at each subsequent year-end:
December 31, 2021 56,000,000
December 31, 2022 53,000,000

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December 31, 2023 60,000,000

Cost to dispose, as per assessment of the appraiser for 2021, 2022 and 2023 are
Php 5,000,000, 6,000,000 and 7,000,000 respectively.

Required:
1. Compute for the total cost of the condominium.
2. Prepare journal entries for 2021, 2022 and 2023 assuming LINETTI uses:
a. Cost model
b. Fair value model

PROBLEM 4:
BOYLE CORP. owns a building purchased on January 1, 2021 for Php 100,000,000.
The building was used as the company’s home office. The building has an estimated
life of 25 years.
In 2025, the company transferred its home office and decided to lease the old
building. Tenants began occupying the old building by the end of 2025. On
December 31, 2025, BOYLE reclassified the building as investment property.
The fair value on the date of reclassification was Php 86,000,000.
Required: Answer the following:
A. If the investment property is to be carried using cost model, how much
should be recognized in the 2025 profit or loss as a gain or loss on transfer
from owner-occupied to investment property?
B. If the investment property is to be carried using cost model, how much
should be recognized in the 2025 OCI as a gain or loss on transfer from
owner-occupied to investment property?
C. If the investment property is to be carried using fair value model, how much
should be recognized in the 2025 profit or loss as a gain or loss on transfer
from owner-occupied to investment property?
D. If the investment property is to be carried using fair value model, how much
should be recognized in the 2025 OCI as a gain or loss on transfer from
owner-occupied to investment property?

PROBLEM 5:

On January 1, 2021, JEFFORDS CORP. bought a piece of land worth Php

2,600,000. JEFFORDS’ business model is to buy and sell the land. On February 1,
2024, JEFFORDS decided to lese the land under an operating lease to another
company. The relevant estimated selling price and cost to sell of the inventories is as
follows:

12/31/2021 12/31/2022 12/31/2023 12/31/2024

Selling price 2,650,000 2,750,000 2,800,000 2,880,000
Cost to sell 150,000 120,000 100,000 130,000

Required: Answer the following:

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 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

A. What is the carrying amount of the inventory as of December 31, 2023

statement of financial position?
B. How much should be initially recorded as cost of the investment property if it
will be accounted using the cost model?
C. How much is the gain on transfer to be recognized if the investment property
will be accounted using the cost model?
D. How much should be initially recorded as cost of the investment property if it
will be accounted using the fair value model?
E. How much is the gain on transfer to be recognized if the investment property
will be accounted using the fair value model?

PROBLEM 6:

On January 1, 2021, DIAZ INC. acquired property consisting of ten bungalows, each
with separate legal title including the land on it which it is built for Php 200,000,000,
20% of which is attributable to the land. The bungalow units have a useful life of 50
years.

The following costs are also incurred and paid on such date:
Nonrefundable transfer taxes not included in the purchase price 20,000,000
Legal fees directly attributable to the acquisition 1,000,000
Reimbursement to the previous owner for prepaying nonrefundable
property taxes for the six-month period ending June 30, 2021 100,000
Marketing and advertising expenses on flyers and commercials 500,000
Ribbon cutting expense to celebrate the opening of the
new rental business 200,000

On June 30, 2021, DIAZ paid local property taxes of Php 100,000 for the year ending
December 31, 2021

On August 1, 2021, the entity incurred repairs and maintenance of Php 120,000.

DIAZ used one of the ten bungalows to accommodate administration and

maintenance personnel. The other nine units are rented out to customers under an
operating lease.

On December 31, 2021, the fair value of each unit was reliably estimated at Php 25
M. The accounting policy is to use the fair value model of the investment property.

Required: Answer the following:

A. What is initial measurement of investment property?

B. What is the initial measurement of the land to be accounted as property, plant

and equipment?

C. What is the initial measurement of the building to be accounted as property,

plant and equipment?

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 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

D. What is the gain from increase in fair value of investment property for the
current year?

E. What is the depreciation expense of the building for the current year?

F. Prepare for the journal entries for 2021.

PROBLEM 7:

On January 1, 2021, SCULLY & HITCHCOCK CORP. purchased a building at a cost

of Php 3,000,000. On the same date, the building was leased out under an operating
lease. The company’s policy regarding the depreciable asset is to depreciate using
straight line method over an estimated useful life of 20 years.

The fair value of the building at the end of 2021 and 2022 is Php 3,100,000 and Php
2,450,000, respectively. On January 1, 2023, the company terminated all lease and
sold the building for Php 2,990,000, incurring disposal cost of Php 120,000. The
value in use of the building at the end of 2021 and 2022 is Php 3,600,000 and Php
3,650,000.

Required: Answer the following:

A. If the investment property is accounted using the cost model, what should be
the amount of derecognition gain or loss to be reported on its profit or loss in
2023?

B. If the investment property is accounted using the fair value model, what
should be the amount of derecognition gain or loss to be reported on its profit
or loss in 2023?

C. Prepare the journal entries from 2021 up to disposal of investment property

under cost model and fair value model.

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