INVESTMENT PROPERTY, OTHER NON-CURRENT FINANCIAL ASSETS AND NON

CURRENT ASSETS HELD FOR SALE

PROBLEMS
8-1. Determine the cost of the following items of investment property acquired by
Sebastian during 2016;

a. Land site for a capital appreciation was acquired for P8,600,000.

Sebastian paid P430,000 commission to a real estate agent. Costs of
P135,000 were incurred to clear the land. During the course of clearing
the land, timber and gravel were recovered and sold for P65,000.

b. Land and building were acquired to be held for lease under operating
leases. The company made a down payment of P4,000,000, issued
20,000 P200 par ordinary shares with market price of P240 per share
and issued a three year non-interest bearing note for P6,000,000. The
note is payable in equal annual installments of P2,000,000 at the end of
each year from the date of purchase. Prevailing interest rate for similar
notes is 10%. Thirty percent (30%) of the purchase price is allocated to
the land.
8-2. Precious Realty Corporation owns and holds several property items that are
held for sale as subdivided lots, condominiums and row houses. In addition, it
also owns the Rainbow Building, which it is leasing to tenants under operating
leases.

In July 2015, because of planned expansion for year 2016, the company served
notices to the Rainbow Building tenants for the termination of lease contracts
on the facilities. On January 2, 2016, the Rainbow Building, which at that date
had a carrying value of P4,000,000, (with cost of P8,200,000) was occupied by
the company to carry out its sale and administrative activities. The corporation
records annual depreciation of P200,000 on the Rainbow Building.

REQUIRED:

Prepare the necessary entries in 2016 as a result of the foregoing. The

company carries its investment property and its property, plant and equipment
using cost model.

8-3. The following information relates to Absolute Company for the year 2016:

Land Held as Investment Property (at cost) P5,000,000

 Fair value at January 1, 2016 6,000,000
Fair value at December 31, 2016 6,800,000
Estimated disposal cost 300,000

Building Held as Investment Property

Construction was completed
at January 1, 2016 at a total
cost of P20,000,000
Estimated useful life 40 years with no
Residual value
Fair value at January 1, 2016 19,000,000
Fair value at December 31, 2016 20,000,000
Estimated disposal cost 500,000

Rent revenue recognized during 2016 3,000,000

Compensation paid to personnel for administrative
and security 200,000
Real revenue taxes applicable to 2016 120,000
Costs of maintenance paid to an outsourced
company 300,000

REQUIRED:

Using both the cost model and the fair value model, determine the following:

(a.) The amount of investment property that will be shown on December 31,
2016 statement of financial position.
(b.) The accounts and amounts taken to profit or loss relating to the
investment property.

8-4. The Adam Company is in the process of opening a new division as a result of
its expansion. As a consequence, its main operation will be transferred to
Manila. It vacated its land building in Davao and held them for commercial
rental under operation leases. On such date, the land had a carrying amount
of P20,000,000, while the building had a carrying amount of P35,000,000, net
of P15,000,000 accumulated depreciation.

An independent appraiser engaged by Adam placed a revalued amount of

P28,000,000 for the land and P42,000,000 for the building.

REQUIRED:
 Formulate entries for the reclassification of the property, assuming that,

(a.) Adam uses the cost model for its investment property.
(b.) Adam uses the fair value model for its investment property.

8-5. The transaction given below relate to a fund being accumulated by Raymond
Company over a period of 20 years for the construction of additional
buildings.

1. Cash is transferred from the general cash account to the fund.

2. Preference shares of Mike Company are purchased as an investment of
the fund.
3. Bonds of SeaLand Corporation are purchased between interest
payment dates at a discount, as an investment of the fund.
4. Dividends are received on Mike Company preference shares.
5. Expenses of the fund are paid.
6. Interest is collected on SeaLand Corporation bonds.
7. Purchased Orange Place Corporation ordinary shares.
8. Sea Corporation bonds are sold at a gain between interest payment
dates.
9. Received cash dividend on Orange Place Corporation ordinary shares.
10. Sold Mike Company preference shares and Orange Place Corporation
ordinary shares at a gain.
11. Cash is paid for building construction.
12. The remaining cash balance in the fund is transferred to the general
cash account.

REQUIRED:

Prepare pro-forma entries to record the following transactions relating to the

fund.

8-6. On January 2, 2016, Cordero Corporation issued P15,000,000 bonds that will
mature in 10 years. The management decided to set up a separate fund for
the retirement of these bonds. The funds is to be placed in a separate account
to be maintained in the company’s depository bank.

In a board resolution, it was decided that deposits of equal amounts will be

made every June 30 and December 31, starting June 30, 2016 through
December 31, 2015. The company expects to earn an average interest of 8%,
net of tax, on this investment.

REQUIRED:
 (a.) Determine the required semiannual deposit that will accumulate
P15,000,000 at the end of 10 years.
(b.) Prepare entries during 2016 as a result of the investment in the funds.

8-7. On July 1, 2012, Dorina Company insured the life of its president for
P4,000,000, paying an annual insurance premium of P120,000. The company
is the designated beneficiary and has the right to cancel the policy at its own
option.

The cash surrender value of the policy increased as follows:

Anniversary date Balance of cash surrender value

June 30, 2013 P -0-

June 30, 2014 -0-
June 30, 2015 36,000
June 30, 2016 49,000
June 30, 2017 62,000

The president died on March 31, 2017.

REQUIRED:

(a) Prepare the entries in the books of Dorina Company for years 2013
through 2017. Dorina closes its books on December 31.
Use the asset method for the prepayment of insurance premiums.
(b) How would the entries differ if the president or his heirs were the
beneficiaries of the life insurance policy?

8-8. On January 1, 2016, Solidbank grants a 10-year P10,000,000 non- interest

bearing advance to its vice-president. The market rate of interest is 12%.

REQUIRED:

(a) At what amount should the receivable from the vice president be taken
up by Solidbank on January 1, 2016?
(b) How much interest income shall be taken up by Solidbank during 2016?
(c) Give the entries in the books of Solidbank for the years 2016 and 2017.
(d) What is the amortized cost of the receivable on December 31, 2017?

8-9. On December 31, 2016, Patriarch Inc. determined to sell a group of assets
within its meat processing plant, as it believed a newly introduced set of
 machineries would be more economical for the company. The assets that it
wanted to sell had the following carrying amounts:

Machinery P2,200,000
Accumulated depreciation 1,200,000
Machinery tools 380,000
Machinery parts 220,000

The management of Patriarch, Inc. calculated the fair value (based on active
market for similar assets) less costs to sell of the disposal group to be
P1,400,000.

The assets were sold on March 17, 2017 for P1,520,000. Selling costs of
P60,000 were paid.

REQUIRED:

(a) Prepare the entries on December 31, 2016.

(b) Prepare the entry for the sale of the assets on March 17, 2017.

8-10. On August 1, 2016, Invercargill Ltd. Decided to dispose of a cash generating

unit within its coal mining segment. The cash generating unit has been
responsible for certain drilling requirements relating to the mining of coal,
which are now outsourced to another entity. The company reviewed the
measurement of the assets in accordance with International Financial
Reporting Standards. The table below shows the carrying amounts of the
assets prior and subsequent to the review:

Carrying amount
Before review After review
Plant (at cost) P220,000 P220,000
Accumulated depreciation (80,000) (80,000)
Equipment 160,000 145,000
Inventory 80,000 75,000
Goodwill 20,000 20,000

Invercargill Ltd. Estimated the fair value less costs to sell of the disposal group
to be P350,000. Six months later, the assets were disposed of for P380,000
cash and company incurred P30,000 selling cost.

REQUIRED:

(a) Prepare journal entries required as a result of the measurement review.

 (b) Prepare the journal entries to measure the assets at fair values less
costs to sell.
(c) Prepare journal entries at the date of sale.

(From Alfredson et. al, Wiley Publication, “Applying International Accounting

Standards,” 2005 edition)

8-11. A piece of equipment with a carrying value of P42,000 on January 1, 2016

meets the criteria for classification as Held for Sale on March 31, 2016. The
equipment is being depreciated over 5 years on a straight-line basis and has a
remaining life for 3 years as of January 1, 2016. The following additional
information is available:

Fair value less cost to sell on March 31, 2016 P36,000

Fair value less cost to sell on December 31, 2016 40,000

REQUIRED:

(a) Give the entries on March 31, 2016 and December 31, 2016 as a result
of the foregoing.
(b) Assume instead that the fair value less cost to sell on December 31,
2016 decreased to P35,000. Give the entry on December 31, 2016.
 MULTIPLE CHOICE

MC1 Which of the following assets held by an enterprises would qualify as

investment property as defined by IAS 40, Investment Property?

I. Land held for capital appreciation

II. Building held to earn rentals
III. Land for sale in the ordinary course of business
IV. Land held for undetermined future use

a. I, II, III and IV

b. I, III and IV
c. I, II and IV
d. I and II only

MC2 Which of the following should form part of the cost of investment property?

I. Legal fees and transfer taxes directly attributable to acquisition

II. Fair value of shares issued by the company to acquire the property
III. Abnormal amounts of wasted material, labor or other resources
incurred in developing the property
IV. Renovation costs on the building to be held to earn rentals

a. I, II, III and IV

b. I, III, and IV
c. I, II, and IV
d. I and II only

MC3 After initial recognition, investment property held by an entity shall be valued
using either the cost model or the

a. fair value model

b. revaluation model
c. realizable value model
d. recoverable amount model

MC4 Under the cost model, a building held by an enterprise as an investment

property shall be valued at

a. cost.
b. cost less accumulated depreciated and impairment loss.
c. cost less accumulated depreciation.
d. current cost.
MC5 Which of the following are valid statement regarding measurement of
investment property?

I. The best evidence of fair value is current price in an active market for
similar property in the same location and condition.
II. When items of investment property are measured at fair values, any
movement in fair value is credited to other comprehensive income
under the heading revaluation surplus.
III. An entity shall continue to measure an investment property at fair
value until its disposal if it has previously valued the property at fair
value.
IV. Transaction cost directly attributable to acquisition of investment
property are capitalized as part of the cost the asset.

a. I, II, III and IV

b. I, III and IV
c. I, II, and IV
d. II and III only

MC6 When an item of asset is transferred to and from the classification investment
property, carried using the cost model, the measurement basis at the date of
transfer is the

a. original cost
b. fair value
c. carrying amount
d. recoverable amount

MC7 When reclassification is made from owner occupied property to investment

property that will be carried at fair value, any excess of the fair value over the
carrying amount at the date of transfer is

a. ignored
b. recognized as a gain profit or loss
c. credited to asset revaluation surplus
d. recorded as a credit to a liability account

MC8 Which of the following are financial assets?

I. Cash
II. Receivables
III. Investment in debt securities
 IV. Prepaid expenses
a. I, II, III and IV
b. I and II only
c. II and III only
d. I, II and III

MC9 Which of the following funds held by an entity is normally classified as a

current asset?

a. Funds for payment of a long-term liability

b. Funds for payment of payroll
c. Funds for acquisition of additional plant-facilities
d. Funds for redemption of preference shares

MC10 When the company pays insurance premium on a life insurance policy of an
officer and the officer or his heirs are the designated beneficiary, any cash
surrender value is

a. ignored
b. credited to life insurance expense
c. recorded as an income
d. shown as part of non-current asset on the statement of financial
position

MC11 If the company is the owner and designated beneficiary of a life insurance
policy covering the company’s officer, any increase in cash surrender value is

a. ignored
b. credited to life insurance expense
c. recorded as an income
d. charged to life insurance expense

MC12 As designated beneficiary on an insurance taken on the life of an officer, an

enterprise receives insurance proceeds upon the death of the insured officer.
What amount of the proceeds shall be taken to profit or loss?

a. The full amount

b. The proceeds minus the balance of the cash surrender value
c. The proceeds plus the balance of the cash surrender value
d. Nothing, as the proceeds shall be credited directly to retained earnings

MC13 Long-term advances and deposit are measured on the statement of financial
position date at
 a. amortized cost using the effective interest method
b. amortized cost using the straight0-line method
c. fair value
d. realizable value

MC14 Assets designated as held for sale must be measured at

a. cost
b. carrying amount
c. lower of cost and carrying amount
d. lower of carrying amount and fair value less cost to sell

MC15 An entity shall classify a non-current asset as held for sale if

a. its carrying amount will be recovered through a sale transaction or

continuing use
b. its carrying amount will be recovered through a sale transaction
c. its carrying amount will be recovered through continuing use
d. if the asset is intended to be disposed of through a sale transaction or
abandonment

MC16 An item of property, plant and equipment qualifies to be reported as “Held for
sale”. Its fair value less cost to sell exceeds its carrying amount at the date its
reclassified as Held for Sale. For accounting purposes, such an excess shall

a. not be accounted for

b. be recognized as gain in profit or loss
c. be recognized as gain in other comprehensive income and transferred
to profit or loss at the date of actual disposal
d. be credited directly to retained earnings

MC17 A non-current asset classified as “held for sale” must be presented on the
financial statements

a. among the non-current, non-financial assets

b. in a separate line item in the current assets section
c. In a separate line item in the non-current assets section
d. only in the notes

MC18 Which of the following is a valid statement regarding “assets held for sale”?

a. Depreciation ceases while the asset are being held for sale
 b. No further loss is taken up on the decline in the fair value of the asset
from the date it is classified as held for sale until the date of actual
disposal
c. No maintenance costs shall be reported in profit or loss during the
period in which the asset is held for sale
d. Assets intended for sale within a period of twelve months from the
statement of financial position date are classified as current assets

MC19 Mega Company and its subsidiaries have a provided you with a list of property
items they own:

Land held by Mega for undetermined future use P10 million

A vacant building owned by Mega and to be leased out
Under an operating lease 20 million
Property held by a subsidiary of Mega, a real estate firm,
in the ordinary course of business 50 million
Property held by Mega for use in production 12 million
A hotel owned by Mega’s subsidiary; the subsidiary
also provides security services to its guests 60 million
A building owned by Mega’s being leased out to Vega,
one of Mega’s subsidiaries, under operating leases 25 million

What amount shall be shown as Investment Property in the consolidated

statement of financial position of Mega and its subsidiaries?

a. P20 million
b. P30 million
c. P85 million
d. P90 million

MC20 Shoshin, Inc. owns land and building in Manila used for operations and
administration. The company uses the cost model and provides you with the
following information on January 1, 2016:

Lend: Cost P20,000,000

Fair value 28,000,000

Building: Cost P40,000,000

Accumulated depreciation 10,000,000
Fair value 35,000,000

On this date, the company transferred its business operations to Ortigas

Center and leased out the land building above to interested business friends
 under operating leases. The company uses the fair value model for all of its
investment property.

How much gain shall be reported in profit or loss resulting from this
reclassification from owner-occupied property to investment property?

a. P0
b. P5 million
c. P8 million
d. P13 million

MC21 Sachi Company had a property with a carrying amount of P15,000,000 held for
sale in the ordinary course of business. On August 1, 2016, Sachi commenced
an operating lease with Sanjo Company; hence, the property was reclassified
from inventory to investment property.

The fair value of this property on August 1, 2016 was P20,000,000 with cost to
sell estimated at P1,000,000.

If the investment property will be carried at fair value, what is the amount of
revaluation to be recognized inn profit or loss in Sachi’s 2016 statement of
comprehensive income as a result of this reclassification?

a. P0
b. P1,000,000
c. P4,000,000
d. 5,000,0000

MC22 The Emem Company acquired a building on January 1, 2016 for P18,000,000.
At that date, the building had a useful life of 40 years. The fair value of the
building was P20,000,000 at December 31, 2016. The building was
appropriately classified as investment property and accounted for using the
cost model.

What amounts shall be presented in the statement of financial position at

December 31, 2016 and recognized in profit or loss for the year then ended
respectively?

a. P20,000,000 and P0
b. P18,000,000 and P0
c. P20,000,000 and gain of P2,000,000
d. P17,550,000 and expense of P450,000
MC23 The Beyonce Company acquired a building on January 1, 2016 for
P18,000,000. At that date, the building had a useful life of 40 years. The fair
value of the building was P20,000,000 at December 31, 2016. The building was
appropriately classified as investment property and accounted for using the
fair value model.

What amounts shall be presented in the statement of financial position at

December 31, 2016 and recognized in profit or loss for the year then ended
respectively?

a. P20,000,000 and P0
b. P18,000,000 and P0
c. P20,000,000 gain of P2,000,000
d. P17,550,000 and expense of P450,000

MC24 The balance of the cash surrender value of life insurance policy maintained on
the life of the president increased from P80,000 to P115,000 during the year.
The company pays an annual insurance premium of P110,000 on this policy.

Assume that the company has the sole right to cancel this policy, life
insurance expense for the year is

a. P75,000
b. P80,000
c. P110,000
d. P145,000

MC25 On June 30, 2016, the XYZ Corporation granted a two-year, non-interest
bearing P200,000 advance to its treasurer. Prevailing interest rate is 12%.

What is the carrying amount of the receivable from the treasurer on

December 31, 2016?

a. P2,000,000
b. P1,594,400
c. P1,690,000
d. P1,785,728

MC26 In 2013, GG Company purchased P5,000,000 life insurance policy on its

president and chief executive officer, of which GG Company is the beneficiary.
Information regarding this policy for 2016 is as follows:
 Cash surrender value, January 1 P100,000
Annual premium paid on January 1 200,000
Dividends earned on the policy 20,000

The dividends were expense reported by GG Company on 2016 was P160,000,

what is the cash surrender value on December 31?

a. P120,000
b. P140,000
c. P160,000
d. P200,000

MC27 JJ Company purchased a P2,000,000 ordinary life insurance policy on its

president and the company is the named beneficiary. Additional data are
available for the year ended December 31, 2016.

Cash surrender value, January 1 - P87,000

Cash surrender value, December 31 – P108,000
Annual premium paid in advance on January 1 – P40,000
Dividend received on July 1 – 6,000

How much should JJ Company report as life insurance expense for 2016?

a. P40,000
b. P34,000
c. P19,000
d. P13,000

MC28 The following information relates to non-current investment placed in trust by

XX Company. The investment is in compliance with the requirements of an
issue of P4,000,000 bonds by XX.

Bond sinking fund, January 1, 2016 P2,250,000

Additional investment to the fund during 2016 450,000
Dividend revenue on equity securities investments 75,000
Interest revenue on debt securities investments 150,000
Administration costs 25,000

What amount should XX Company report in its December 31, 2016 statement
of financial position related to its non-current investment for bond sinking
fund?
 a. P2,925,000
b. P2,900,000
c. P2,875,000
d. P2,700,000

MC29 On April 12, 2016, WY Company adopted a plan to accumulate P5,000,000 by

July 1, 2020. WY plans to make four equal annual deposits to a fund that will
earn interest at 10% compounded annually. WY made the first deposit on July
1, 2016. Future value factors are as follows:

Future value of 1 at 10% for 4 periods 1.46

Future amount of ordinary annuity of 1 at 10% for 4 periods 4.64
Future amount of annuity in advance of 1 at 10% for 4 periods 5.11

How much annual deposit should WY Company make for four years in order
to accumulate the desired amount on July 1, 2020?
(Rounded)

a. P1,250,000
b. P1,077,500
c. P978,500
d. P730,000

MC30 A building owned and previously occupied by the company was vacated and
was being negotiated for sale. The sale is highly probable and is expected to
be consummated within 6 months. The building had a cost of P20,000,000 and
accumulated depreciation of P12,000,000. The fair value of the building is
P9,000,000. The company expects to incur selling costs of P1,500,000 on the
disposal of this building.

At what amount should this asset be measured on the company’s statement

of financial position?

a. P20,000,000
b. P9,000,000
c. P8,000,000
d. P7,500,000

MC31 Use the same information given in MC30. Assume that the building was sold
after the end of the reporting period at P9,200,000, after incurring disposal
cost of P1,300,000.

How is the profit (before income tax) during the year of sale affected?
 a. no effect
b. decrease of P100,000
c. increase of P200,000
d. increase of P400,000

MC32 On June 30, 2016, L Company classified a non-current asset as “Held for Sale”.
On this date, before its reclassification, its carrying amount was P5,000,000
and its expected selling price was P4,500,000, with expected cost to sell of
P300,000.

By December 31, 2016, the asset had not yet been sold, but the management
is still committed to plan sell it, and sale the is considered to be highly
probable. The entity estimated that because of recent changes for the
demand of the product that is produced by the asset and expected favorable
price movement, the asset was now expected to be selling at P5,500,000 with
related cost to sell unchanged. Depreciation from July 1 to December 31
would have been P500,000.

What amount of gain shall be recognized at December 31, 2016 as a result of

the increase in the fair value less cost to sell of the asset?

a. P0
b. P700,000
c. P800,000
d. P1,000,000