Exercises - Ias 40 - EN

Exercises IAS 40
EX1: Initial recognition and measurement

On 1 January 20.1, Wise Limited acquired an investment property for R11 million. The
purchase agreement provided for settlement in full on 31 December 20.1 (an appropriate
discount factor is 10%). R1 million transfer duty and R20 000 legal fees were incurred and
paid during January 20.1 in respect of the acquisition of this property. Rates for the year
ended 31 December 20.1 of R100 000, were paid on 30 November 20.1. All amounts given
are exclusive of value added tax.
During 20.1, Wise Limited constructed an investment property, expenditure on which is
detailed below: • Labour: R2 million (R200 000 of which was incurred due to restore faulty
work performed by ‘scab’ labourers whilst the company’s employees were on strike and a
further R100 000 was in respect of unproductive time whilst waiting for the foundations to
dry); • Materials: R8 million (R1 000 000 of which was incurred to restore faulty work
performed by ‘scab’ labourers whilst the company’s employees were on strike and an
estimated further R500 000 in normal wastage). • Other resources: R2 000 000.
Wise Limited completed the self-constructed building on 30 November 20.1 and made an
operating loss on this investment property of R500 000 (due to low initial occupancies) for
the month of December 20.1. It is anticipated that this investment property will reach
break-even occupancy during August 20.2, and the total budgeted operating loss to that
date is estimated to be R2 million.
Required: Calculate the cost of each of the investment properties to be recognised by Wise
Limited upon initial recognition of the investment properties.
Ex.2: Subsequent expenditure

During 20.2, Wise Limited (see illustrative example above) made the following
expenditures on the investment property that it has constructed itself during 20.1: • R1
million on erecting shade-cloth covered-parking for its tenants, in respect of which
additional operating lease rentals of R25 per month per covered parking bay will be
received; • R3 million on tarring parking for an additional 200 customer parkings for the
tenants customers, no additional rentals are to be received in respect of this expenditure;
• R400 000 on repairing the roof in respect of hail damage caused during 20.2 (as hail does
not usually fall in the location of this building, this expenditure was totally unanticipated
and failure to incur the expenditure would result in a substantial loss of future rental
income); • R2 million in property rates; and • R200 000 legal fees on debt collection for
‘delinquent’ tenants.
Required: Determine the amount that in accordance with IAS 40 must be: • Capitalised
to the investment property, and • Expensed in arriving at operating profit for the year ended
31 December 20.2.
EX 3: Determination of fair value

During 20.3, Ripoff Limited built a three-storey fully furnished (furnishings cost R2
million) and ducted air-conditioned (air-conditioner cost R4 million) office building ‘The
Pink Palace’ with a stateof-the-art Otis elevator (elevator cost R3 million). The total cost
of constructing the building including the fittings mentioned was R25 million. The building
was completed in July 20.3 and was immediately let out to twenty-five small-businesses
under operating leases. The small businesses pay their rentals monthly in advance on the
last day of the preceding month. Such prepaid rental amounted to R500 000 on 31
December 20.3.
Ripoff Limited applies the fair value model to account for its investment property. At 31
December 20.3, Verygood Valuers (Pty) Ltd valued the fully furnished office building at
R30 million (after taking in account the prepaid rental of R500 000).
Required: List, with brief reasons, the classification and amount at which each of the
assets and liabilities determinable from the information provided shall be presented in
Ripoff Limited’s statement of financial position at 31 December 20.3.
Ex 4 How would you classify the following properties?
1. Question: You own a small apartment to rent out, but your tenant goes bankrupt.
You are looking for another tenant and during your search, you use the apartment
as your office. Investment or owner-occupied?
2. Question: You enter into a 30-year finance lease for a part of a building that you
plan to let to your tenants.
3. Question: You run a hotel. Its main activity is to rent apartments and rooms on the
short-term basis.
4. Question: A big investment company purchased a land deep under its fair value. As
it was such a great bargain, the company is undecided what to do with the land –
either to sell it later or to develop some property on it. The decision will be taken in
the later accounting period.
5. Question: You acquired a building under 30-year finance lease. You refurbished the
offices and plan to sublet these offices, but you are awaiting approvals from the
local authorities.
6. Question: You own an office building with 50 offices. You use 20 offices for your
own consulting business and you sublet 30 offices to tenants.
7. Question: A subsidiary owns a building that fully leases out to its parent company.
A parent company uses this building for own office space.
EX 5: Transfers of investment property

A company acquired a building for CU 100 000 in 20X1 and rented it out to tenants for
several years.
On 1 January 20X4, the company decided to terminate the rental contracts with tenants and
started to use the building for its own office space.
On 1 January 20X4:
• Carrying amount of building was CU 150 000 (being its fair value)
• Expected useful life is 30 years
• Fair value of building at 31 December 20X4 was CU 155 000.
Show the journal entries with respect to this building in 20X4. Company applies cost model
for its p0roperty, plant and equipment and fair value model for its investment property.
Ex6 Building and 2 models

On 1 January 20X1, ABC company acquired a building with the total cost of CU 300 000.
As of 31 December 20X1, the following information is available:
• Building’s useful life is 30 years.
• Building’s fair value at 31 December 20X1 is CU 310 000.
What accounting entries shall ABC make with respect to this building in 20X1 under:
• Fair value model
• Revaluation model

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Exercises IAS 40

EX1: Initial recognition and measurement

Ex.2: Subsequent expenditure

EX 3: Determination of fair value

EX 5: Transfers of investment property

Ex6 Building and 2 models

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