Reference no: EM132934430
PROBLEM - LINETTI INC. started its construction of condominium in Tondo, Manila. The management of LINETTI INC. decided that the business purpose of constructing the condominium is to hold this property for purposes of earning rentals to potential tenants in Manila City. LINETTI has no plan on selling any condominium units on the building under construction once the property is completed.
The construction of the condominium was completed on January 1, 2021 and it was available for use on February 1, 2021. The cost of construction of the condominium are as follows (all paid in cash):
Materials, labor and overhead 40,000,000
Borrowing costs specifically identified on the construction 2,000,000
Driveway, parking bay and safely lighting 8,000,000
Architect and engineer's fee 5,000,000
Savings on construction 10,000,000
Cost of changes during construction to make the condominium more energy efficient 3,000,000
Marketing fee for the promotion of the condominium 1,000,000
The useful life of the condominium is 25 years and the residual value is Php 5,000,000.
After the construction of the condominium, an independent appraiser provided the following fair values at each subsequent year-end:
December 31, 2021 - 56,000,000
December 31, 2022 - 53,000,000
December 31, 2023 - 60,000,000
Cost to dispose, as per assessment of the appraiser for 2021, 2022 and 2023 are Php 5,000,000, 6,000,000 and 7,000,000 respectively.
Required -
1. Compute for the total cost of the condominium.
2. Prepare journal entries for 2021, 2022 and 2023 assuming LINETTI uses:
a. Cost model
b. Fair value model