Investment property tutorial questions
Tutorial 1 (SEEN) Investment properties: Basic level
fair value model versus
revaluation model (PPE)
1. List the three main differences between the fair value model and the
revaluation model.
2. The carrying value of buildings owned by The De Villiers Company at the
beginning of the year was CU2.5 million. The fair value at the beginning of the year
was estimated at CU3.5 million, and the fair value at the end of the year was
CU3.8 million. Assume that depreciation was CU200 000 for the year regardless of
when the valuation was conducted.
Calculate the carrying value of the buildings at the end of the year if:
a) Buildings are occupied by the company and thus classified as property, plant
and equipment, and recognised according to the revaluation model. The De
Villiers Company revalues buildings at the beginning of the year.
b) Buildings are occupied by a third party, classified as investment
properties and recognised according to the fair value model.
Tutorial 1 (SEEN) Suggested solution Basic level
1.
Fair value model Revaluation model
No depreciation Depreciation
Only available to investment property Only available to property, plant and
equipment Every year Sufficient regularity
Impairment test yearly in effect Only impairment test if signs of impairment
2. a) CU3.5 million less CU200 000 depreciation = CU3.3 million
b) CU3.8 million
Tutorial 2 (SEEN) Property classification Basic level
Company A acquired a property on 1 January 20x2 for CU1 400 000, of which CU400 000 is
related to the cost of the land. The building was a large warehouse. Ignore VAT.
At the acquisition date, it was determined that the warehouse:
● Had an estimated useful life of 25 years
● Would be used evenly over the period
● The residual value was estimated at CU800 000.
The estimated useful life, residual value and depreciation method were confirmed at each
subsequent balance sheet date.
The market value (fair value) of the property was determined as follows:
Date Land Warehouse1 Total
1 January 20X5 CU963 000 CU1 537 000 CU2 500 000
1 January 20X4 CU871 000 CU1 329 000 CU2 200 000
1 January 20X3 CU664 000 CU1 136 000 CU1 800 000
You are required to do the following:
1. Prepare the journal entries to record all the transactions relating to the property for the
financial years that ended on 31 December 20x3, 20x4 and 20x5, for each of the
following situations:
Situation 1:
Company A occupied the warehouse since the acquisition date. The company applies a
policy of revaluing property every year based on the depreciated replacement cost, and
accumulated depreciation is eliminated against the carrying value of the asset at each
revaluation date.
Situation 2:
Company A signed a rental contract on 2 January 20x2, the terms of which stipulated that
the tenant would occupy the warehouse for at least ten years at an escalating monthly
rental charge of CU15 000. Company A has always applied the fair value model for rented
property.
2. Show how the property should be disclosed in the property note to the financial
statements for the year ended 31 December 20x4 for each of the two situations listed in
a) above.
Accounting policy notes and disclosure in the balance sheet are not required, but
comparatives should be shown.
1 This represents the current market value of the existing warehouse, in other words the net
replacement cost.
Tutorial 2 (SEEN) Suggested solution Basic level
1. Journal entries:
Situation 1:
20x3 financial year:
Dr Accumulated depreciation (SFP) 8 000
Cr Land & buildings (SFP) 8 000
Netting off acc depreciation to cost of the property at revaluation
Dr Land & buildings (SFP) 408 000
Cr Revaluation gain (OCI) 408 000
Revalue property: CU1 800 000 – (400 000 + 992 000)
Dr Depreciation (SFP) 14 000
Cr Accumulated depreciation (SFP) 14 000
Depreciation expense for the year (CU1 136 000 – 800 000) / 24 years
20x4 financial year:
Dr Accumulated depreciation (SFP) 14 000
Cr Land & buildings (SFP) 14 000
Netting off acc depreciation to revalued cost of property at revaluation
Dr Land & buildings (SFP) 414 000
Cr Revaluation gain (OCI) 414 000
Revalue property: CU2 200 000 – (664 000 + 1 122 000)
Dr Depreciation (P/L) 23 000
Cr Accumulated depreciation (SFP) 23 000
Depreciation expense for the year: (CU1 329 000 – 800 000) / 23 years
20x5 financial year:
Dr Accumulated depreciation (SFP) 23 000
Cr Land & buildings (SFP) 23 000
Netting off acc depreciation to revalued cost of property at revaluation
Dr Land & buildings (SFP) 323 000
Cr Revaluation gain (OCI) 323 000
Revalue property: CU2 500 000 – (871 000 + 1 306 000)
Dr Depreciation (P/L) 33 500
Cr Accumulated depreciation (SFP) 33 500
Depreciation expense for the year: (1 537 000 – 800 000) / 22
Situation 2:
20x3 financial year:
Dr Investment property (SFP) 400 000
Cr Gain on fair value adjustment (P/L) 400 000
Fair value adjustment of investment property at y/e (CU1 800 000 – 1 400 000)
20x4 financial year:
Dr Investment property (SFP) 400 000
Cr Gain on fair value adjustment (P/L) 400 000
Fair value adjustment of investment property at y/e (CU2 200 000 – 1 800 000)
20x5 financial year:
Dr Investment property (SFP) 300 000
Cr Gain on fair value adjustment (P/L) 300 000
Fair value adjustment of investment property at y/e (CU2 500 000 – 2 200 000)
2. Disclosure:
Situation 1:
Notes to the financial statements for the year ended 31 December 20x4
20x4 20x3
Property: CU CU
Carrying value at beginning of year 1 786 000 1 392 000
Revalued cost 1 800 000 1 400 000
Accumulated depreciation (14 000) (8 000)
Revaluation 414 000 408 000
Depreciation (23 000) (14 000)
Carrying value at end of year 2 177 000 1 786 000
Revalued cost 2 200 000 1 800 000
Accumulated depreciation (23 000) (14 000)
Historical cost: 1 376 000 1 384 000
Cost 1 400 000 1 400 000
Accumulated depreciation (24 000) (16 000)
Property situated at ….. , acquired on 1 April 20x2 at a
cost of CU1 400 000. The property is revalued on 1
January each year by …..
Calculation: Warehouse
Historical cost
Cost of warehouse CU1 000 000
Depreciation (1 000 000 – 800 000) / 25) (8 000)
Carrying amount at 31/12/20x2 992 000
Depreciation (24 years remaining) (8 000)
Carrying amount at 31/12/20x3 984 000
Depreciation (23 years remaining) (8 000)
Carrying amount at 31/12/20x4 976 000
Situation 2:
Notes to the financial statements for the year ended 31 December 20X4
20x4 20x3
Property: CU CU
Balance at the beginning of year 2 200 000 1 800 000
Fair value gain recognised in statement of 300 000 400 000
comprehensive income
Balance at the end of the year 2 500 000 2 200 000
Property situated at ….. , acquired on 1 January 20x2 at
a cost of CU1 400 000. The fair value of investment
property is based on market prices at the respective
dates.
Allowed alternative accounting treatment for property in terms of IAS40:
Property can be recognised at cost, less accumulated depreciation and accumulated
impairment, as described in IAS 16 (in other words, the cost model).
Tutorial 3 (UNSEEN) Transfers to/from Intermediate level
investment properties
B Ltd develops properties for resale, constructs buildings and invests surplus cash in
properties. B Ltd uses the fair value model to value investment properties and the cost
model for owner-occupied properties.
During the year ending 31 December 20x9, the following changes in use relating to
properties arose:
1. Property A, which had previously been surplus to group requirements and
was therefore rented out, is now occupied by B Ltd. The property had cost B
Ltd
CU2 million, the fair value was CU2.8 million at 31.12.20x8, and CU2.7 million at the
date when the occupation took place.
2. Property B is a tract of land that is now under development, with a view to being
subdivided into 40 plots and sold. At the end of the year, no plots were sold, but
CU4 million development expenditure was incurred. The land had a cost of CU8
million on 01.01.20x6 and a fair value of CU9.6 million at 31.12.20x7. A decision to
commence development with a view to sale was made early in January 20x8, and
development of the property started soon thereafter.
3. An office block, Property C, is surplus to the requirements of B Ltd and has been
rented to tenants in terms of an operating lease for a three-year period. On the date
that the building was vacated by B Ltd, the statement of financial position reflected
the asset at a cost of CU3.8 million and accumulated depreciation of CU1.2 million.
The fair value of the property at that date was CU3.6 million.
You are required to do the following:
Discuss the accounting consequences arising from the property transfers and prepare any
journal entries required to affect the transfers. Tax adjustments should be ignored.
Tutorial 4 (UNSEEN) Classification of property Intermediate level
Entity A owns several types of properties and has difficulty when deciding how to classify
these properties as either:
● Property, plant and equipment (in accordance with IAS 16)
● Investment property (in accordance with IAS 40), or
● Inventory (in accordance with IAS 2).
1. How do we differentiate between properties that are classified as property, plant and
equipment (thus applying IAS 16), investment property (thus applying IAS 40) or
inventory (thus applying IAS 2)?
2. Give an example of each type of property and briefly explain why the
specific example given would be classified as either property, plant and
equipment; investment property; or inventory.
