Question 1
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 $250,000
and was being depreciated over 50 years. At 30 June 20X9 its fair value was
judged to be $350,000.
Required:
How will this appear in the financial statements at 31 December
20X9?
Solution
Question 2
An entity owns two investment properties, X and Y, the fair values
of which are:
31
December 2006 31 December 2007
$
million $ million
Property X 15 20
Property Y 10 8
The original cost of the properties was $9 million each when they
were acquired on 1
January 2005. The entity uses the fair value model to value all
its investment properties.
Required:
How will these transactions be accounted for in the financial
statement.
Question 3
An entity purchased an investment property on 1 January 2004, for
a cost of $400,000. The property has a useful life of 50 years, with no
residual value, and at 31 December 2006 had a fair value of $560,000. On 1
January 2007 the property was sold for net proceeds of $540,000.
Required:
How will the disposal be treated using the Cost Model and the Fair
Value Model.
Question 4
XYZ plc owns three investment property, X, Y, Z, the values of
which are:
31
December 2002 31 December 2003
$
million $ million
Property X 27 32
Property Y 18 24.5
Property Z 26 23.5
The original cost of the properties was $20million each when they
were purchased on 1st January 2001. The entity uses the fair value model
to value all its investment properties.
Required:
Show the financial statement extract for each of the three years
ended 31st December, 2003.
Financial Reporting – Paper 8
ReplyDelete31 May, 2017 Page 6 of 9
Question 3
(a) IAS 40: Investment Property defines investment property as property (land
or buildings or part of the building or both) held to earn rentals or for
capital appreciation or both. It further specifies the conditions for
recognition and measurement of assets classified as investment property.
Required:
Discuss the conditions that should be satisfied for an investment property
to be recognised as an asset in the financial statements and exceptions of
assets that should not be classified under investment property.
(5 marks)
(b) Nyumbani Ltd acquired two properties of land one for Shs 100 million on 1
January, 2015 and another on 31 December, 2015 for Shs 80 million.
During the year ended 31 December, 2016 Nyumbani Ltd constructed its
head offices valued at Shs 120 million on the land whose cost was Shs 80
million and nothing has yet been decided on what it should use the land
that cost Shs 100 million.
The prices of land in Uganda and Kampala in particular are increasing day
by day because of high demand and inflation. Experts estimate that the
average inflation rate of the prices of land is 15% per annum.
Required:
(i) Discuss the two measurement bases used in ascertaining the value
of an investment property in accordance with IAS 40.
(2 marks)
(ii) Given that the two properties of land are located in Kampala and
that Nyumbani Ltd uses fair value measurement in valuing its land,
and depreciates its building at the rate of 5% annually on straight
line basis; show how the above transactions will be recognised in
the financial statements for the year ended 31 December, 2016
giving extracts of the financial statements.
(13 marks)
(Total 20 marks)
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