MZUMBE UNIVERSITY CPA REVIEW CLASSES

DEPARTMENT OF ACCOUNTING AND FINANCE

QUESTION TWO
Kinax financial consultant owns a building which has been lets in lease. The terms of the lease
envisage the costs of the maintenance and operation of the building to the owner of the property.
Required:
Does the building qualify as the investment property?

QUESTION THREE
Kinax professional firm owns a hotel which is managed by the company itself to provide rooms
to the guests.
Required:
Does the building qualify as the investment property?

Question four

AB Ltd is local government organization that owns a credible portfolio of properties which
includes the properties which are surplus to the functional requirements and some other
properties which are held by the entity for different purposes.
The portfolio includes several plots of land which are held for capital appreciation and may be
sold in the future. The entity has also some properties which have no current purpose, as the
entity has not yet determined whether it will use those properties to provide services such as
those provided by national parks or will put these on sales in the ordinary course of business.
AB Ltd also has a housing department to deal with regular sale and purchase of some plots of
land included within the portfolio of the properties, in the normal course of business to
supplement its income. Parts of the portfolio, some properties which are not held for sale, are
provided as a housing facility to low-income employees at nominal rentals, which are then used
to cover the cost of maintenance of the properties.

Required:
How the properties included in the portfolio will be accounted for in the financial statements of
AB Ltd.

QUESTION FIVE

AB Ltd owns two properties at 1 January 2013:

Property X:

A headquarter building is held by the entity for administrative use. The property has a carrying
value of $4 million at 1 January 2013 with a remaining life of 20 years. At 1 July 2013, the entity
under goes a reorganization and as a result, the property was let out to a third party and
reclassified as an investment property under fair value model as per IAS 40. An independent
expert valued the property at a fair value of $4.6 million at 1 July 2013, and this has risen up to
$4·68 million at 31 December 2013.

Property Y:

This is an office building, which is sub-let to a subsidiary of AB Ltd. The property had a fair
value of $3 million at 1 January 2013, which was raised to $3·30 million at 31December 2013.

Required:
  Prepare extracts of financial statements of AB Ltd for the year ended 31/12/2013.
 The treatment of Property ‘Y’, in the consolidated financial statements of AB Ltd.

QUESTION FIVE
W. Ltd purchased a property on 1st January 2009 for RWF3,000,000. W. Ltd intended to
renovate the property and let the building to a government department, due to locate in the area
under its decentralisation programme. A further RWF600,000 was spent over the next 11
months in getting the building ready for letting. No lease had been signed by the government
department. The building was ready for tenant occupation on 1st December 2009.
The valuation of the completed property on 31st December 2009 was RWF4,000,000.
However, due to unforeseen budgetary difficulties, the government shelved its decentralisation
plan and the property remained unoccupied.
In February 2010, the property was valued at RWF4,200,000 and W. Ltd decided immediately
to relocate its head office to this property. W Ltd secured tenants for its old headquarters. The
book value of that head office was RWF3,000,000 and the market value at the date of letting in
February 2010 was RWF3,600,000.
The valuations of both properties were provided by independent qualified valuers.
Required:
How should W Ltd account for these property movements under IAS 40 and IAS 16, assuming
the company implements the Fair Value Model and the Revaluation Model, respectively?

QUESTION SIX

A business owns a building which it has been using as a head office. In order to reduce costs, On
30 June 20X9 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 20X0 of TZS 250,000 and was being depreciated
over 50 years. At 30 June 20X9 its fair value was fudged to be TZS 350,000.
Required:
How will this appear in the financial statements at 31 December 20X9?

QUESTION SEVEN

On 1 April 2016, Epsilon purchased a new head office property for $60 million. On 1 April
2016, Epsilon leased out the top three floors of the property to a third party on a long-term
operating lease. The annual rental receivable by Epsilon was $2 million, starting on 31 March
2017. The top three floors of the property were capable of being sold in a separate transaction.
On 1 April 2016, the directors of Epsilon estimated that the initial cost of the property should be
allocated as follows for accounting purposes:
$ million
Top three floors of building 15
Remainder – buildings component 20
Remainder – land component 25
Total initial cost 60

On 31 March 2017, the property had an estimated total fair value of $64 million. The directors
consider that 25% of this fair value was attributable to the top three floors of the property. The
directors of Epsilon wish to use the cost model for measuring property, plant and equipment and
the fair value model for measuring investment property. Epsilon depreciates the buildings
component of properties over an estimated useful life of 50 years, with no estimated residual
value. The rental payable to Epsilon on 31 March 2017 was paid in accordance with the terms of
the lease.
Required:
Explain and state how event should be reported in the financial statements of Epsilon for the year
ended 31 March 2017
QUESTION EIGHT
a) Define the term “investment property” and explain the two models permitted by the
IAS40 for measurement of investment property after its initial recognition.
b) How do these models differ from the two models permitted by IAS16 in relation to the
measurement of property, plant and equipment?
c) Give three examples of properties (land and buildings) that should classified as
investment properties.
d) Pe-cok has investment property accounted for under the cost model. On 1 September
20X5, the cost of the property is Tshs300 million, and accumulated depreciation is
Tshs105 million. On the same day, it sells the property for Tshs275 million. It has
another investment property with a cost of Tshs90 million and accumulated depreciation
of Tshs40 million. The property is transferred to the inventory category.

Required:
Explain the accounting for these transactions / events.

QUESTION NINE
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.