Reference no: EM132955417
PROBLEM 1 - On January 1, 2020, William Company acquired land and building for P15,000,000, which will be used for periodic rentals to the different lessee. 30% is applicable to the land, and the remainder is to the building. During the year, the company able to lease out some of the spaces in the building amounting to P3,000,000. Operating costs to maintain the leased property amounted to P1,900,000, excluding its depreciation. The policy of the company is to depreciate its fixed assets using the straight-line method. The estimated life of the building is 40 years. On December 31, 2020, the land and building have a fair value of P16,500,000.
Requirements -
1. What is the net income of the rental business, assuming that the company is using the fair value model to account for its investment property?
2. What is the effect of the company's net income from a rental business if the company is using the cost model to account for its investment property, instead of the fair value model.
3. Assume that on December 31, 2021, the fair value of the land and building is P15,500,000.
Prepare the journal entry to account for the changes in the fair value of the investment property.
The company uses the fair value model.
4. Using the same information in requirement no. 3, what will be your journal entry if the company is using the cost model.
PROBLEM 2 - On January 1, 2020, Cedric Ian Company acquired property consisting of ten identical freehold detached houses, each with a separate legal title including the land on which it is built for P150,000,000, 30% of which is attributable to the land. The units have a useful life of 50 years. The following costs are also incurred on such date:
Non-refundable transfer taxes not included in the purchase price 10,000,000
Legal cost directly attributable to the acquisition 2,000,000
Reimbursement to the previous owner for prepaying non-refundable property taxes for the six months ending June 30, 2015, 15,000
Advertising campaign 300,000
Opening function to celebrate new rental business 150,000
On July 1, 2020, the entity paid local property taxes of P30,0000 for the year ending June 30, 2021.
Throughout 2020, the entity incurred repairs and maintenance of P80,000.
The entity used one of the fifteen units to accommodate the administration and maintenance staff.
The other units are rented out to independent parties under an operating lease.
On December 31, 2020, the fair value of each unit was reliably estimated at P18,000,000. The fair value of the units can be measured reliably. The accounting policy is to use the fair value model for an investment property.
Requirements -
1. What is the necessary journal entries to record the above transactions.
2. Assume that the company is using the cost model in accounting for the investment property, prepare the journal entries to record the above transactions.
3. Compute the carrying value of the investment property using the fair value model.
4. Compute the carrying value of the investment property using the cost model.