CHAPTER 11 – SUGGESTED SOLUTIONS FOR STUDENT QUESTION BANK

Tutorial 11.1 Suggested solution Basic level

1.
Fair value model Revaluation model
No depreciation Depreciation
Only available to investment property Only available to property, plant and equipment
Every year Sufficient regularity
Impairment test yearly in effect Only impairment test if signs of impairment

2. a) CU3.5 million less CU200 000 depreciation = CU3.3 million

b) CU3.8 million
 Tutorial 11.2 Suggested solution Basic level

1. Journal entries:

Situation 1:

20x3 financial year:

Dr Accumulated depreciation 8 000
Cr Land & buildings 8 000
Netting off acc depreciation to cost of the property at revaluation

Dr Land & buildings 408 000

Cr Revaluation gain (OCI) 408 000
Revalue property: CU1 800 000 – (400 000 + 992 000)

Dr Depreciation 14 000
Cr Accumulated depreciation 14 000
Depreciation expense for the year (CU1 136 000 – 800 000) / 24 years

20x4 financial year:

Dr Accumulated depreciation 14 000
Cr Land & buildings 14 000
Netting off acc depreciation to revalued cost of property at revaluation

Dr Land & buildings 414 000

Cr Revaluation gain (OCI) 414 000
Revalue property: CU2 200 000 – (664 000 + 1 122 000)

Dr Depreciation 23 000
Cr Accumulated depreciation 23 000
Depreciation expense for the year: (CU1 329 000 – 800 000) / 23 years

20x5 financial year:

Dr Accumulated depreciation 23 000
Cr Land & buildings 23 000
Netting off acc depreciation to revalued cost of property at revaluation

Dr Land & buildings 323 000

Cr Revaluation gain (OCI) 323 000
Revalue property: CU2 500 000 – (871 000 + 1 306 000)

Dr Depreciation 33 500
Cr Accumulated depreciation 33 500
Depreciation expense for the year: (1 537 000 – 800 000) / 22
 Situation 2:

20x3 financial year:

Dr Investment property 400 000
Cr Gain on fair value adjustment (I/S) 400 000
Fair value adjustment of investment property at y/e (CU1 800 000 – 1 400 000)

20x4 financial year:

Dr Investment property 400 000
Cr Gain on fair value adjustment (I/S) 400 000
Fair value adjustment of investment property at y/e (CU2 200 000 – 1 800 000)

20x5 financial year:

Dr Investment property 300 000
Cr Gain on fair value adjustment (I/S) 300 000
Fair value adjustment of investment property at y/e (CU2 500 000 – 2 200 000)

2. Disclosure:

Situation 1:

Notes to the financial statements for the year ended 31 December 20x4

20x4 20x3
Property: CU CU
Carrying value at beginning of year 1 786 000 1 392 000
Revalued cost 1 800 000 1 400 000
Accumulated depreciation (14 000) (8 000)
Revaluation 414 000 408 000
Depreciation (23 000) (14 000)
Carrying value at end of year 2 177 000 1 786 000
Revalued cost 2 200 000 1 800 000
Accumulated depreciation (23 000) (14 000)

Historical cost: 1 376 000 1 384 000

Cost 1 400 000 1 400 000
Accumulated depreciation (24 000) (16 000)
Property situated at ….. , acquired on 1 April 20x2 at a
cost of CU1 400 000. The property is revalued on 1
January each year by …..

Calculation: Warehouse
Historical cost
Cost of warehouse CU1 000 000
Depreciation (1 000 000 – 800 000) / 25) (8 000)
Carrying amount at 31/12/20x2 992 000
Depreciation (24 years remaining) (8 000)
Carrying amount at 31/12/20x3 984 000
Depreciation (23 years remaining) (8 000)
Carrying amount at 31/12/20x4 976 000
Situation 2:

Notes to the financial statements for the year ended 31 December 20X4

20x4 20x3
Property: CU CU
Balance at the beginning of year 2 200 000 1 800 000
Fair value gain recognised in statement of 300 000 400 000
comprehensive income
Balance at the end of the year 2 500 000 2 200 000
Property situated at ….. , acquired on 1 January 20x2 at
a cost of CU1 400 000. The fair value of investment
property is based on market prices at the respective
dates.

Allowed alternative accounting treatment for property in terms of IAS40:

Property can be recognised at cost, less accumulated depreciation and accumulated
impairment, as described in IAS 16 (in other words, the cost model).
 Tutorial 11.3 Suggested solution Intermediate

1. Property A has changed from an investment property to an owner-occupied property

as the property is now used by B Ltd for ‘use in the production or supply of goods and
services or for administrative purposes’.

As investment property is accounted for on the fair value model, the transfer takes
place at fair value.

From the date of commencement of owner-occupation, the property will be disclosed

at cost and depreciated over its remaining useful life. A loss of CU100 000
(CU2.8 million–CU2.7 million) will be recognised in profit or loss as a fair value
adjustment while the property was an investment property. The fair value of the
property on the date on which it became owner-occupied (CU2.7m) will be the cost
used for subsequent accounting in terms of IAS 16.

Journal entries:
Dr Loss on investment property (P/L) 100 000
Cr Investment Property 100 000
Restatement of property to fair value

Dr Property – owner occupied 2 700 000

Cr Investment property 2 700 000
Reclassification of investment property

2. Property B is transferred from investment property to inventories (specifically work-in-

progress). The transfer will take place at the fair value at the date of commencement
of development with a view to sale. As development commenced at the beginning of
the current year, the fair value at the previous reporting date should be used (in other
words, CU9.6 million).
Journal entries:

No fair value adjustment is required as the investment property was already fairly
valued at the end of the previous reporting period.

Dr Inventories – work-in-progress 9 600 000

Cr Investment properties 9 600 000

Reclassification of investment property as inventory

Dr Inventories – work-in-progress 4 000 000

Cr Bank/Creditors 4 000 000

3. Property C should be reclassified as an investment property from the date on which it

ceases to be owner-occupied. The property should be depreciated for the period of the
year until it ceases being owner-occupied. The carrying amount of the property at that
date was CU2.6 million, at which date the fair value of the property was CU3.6 million.
The increase in value of CU1 million should be treated as a revaluation in terms of
IAS 16.
Journal entries:

Dr Investment property 3 600 000

Dr Accumulated depreciation 1 200 000
Cr Property – owner-occupied 3 800 000
Cr Revaluation gain (OCI) 1 000 000
Owner-occupied property reclassified as investment
Property, adjustment recognised in other comprehensive income
 Tutorial 11.4 Suggested solution Intermediate

1. a) Investment property, as A Ltd owns Property A and is holding the building for
the purposes of earning rentals under an operating lease.

b) The lease of the land is a finance lease as ownership transfers to the lessee.
B Ltd will thus derecognise Property B; therefore, it is not an investment
property for B Ltd.

2. DEF Ltd can choose to account for its property interest with ABC Ltd as an operating
lease or as an investment property, provided DEF Ltd adopts the fair value model in
respect of its investment properties.

3.
Dr Inventory 5m
Cr Fair value gain 5m

Dr Investment property 19m

Cr Inventory 19m

Dr Def tax P/L 1.4m

Cr Def tax (SFP) 1.4m
(5 000 x 28%)
Tutorial 11.5 Suggested solution Advanced

Classification of 214 Main Road:

The classification of this building is contingent upon how economic benefits are expected to be
derived. This requires consideration of both the nature of the business activities for which the
building is employed and the entities occupying the building. It is, therefore, relevant to consider
the various possibilities to which the building could be classified.

Individual financial statements of Elysium Ltd

Inventory: The building was not acquired for resale in the ordinary course of business. It would
thus not be appropriate to classify the building as inventory at any point in time.
Portions of the building (‘floor space’) are held for different purposes: The various portions of
the building can be sold separately. Therefore, they are accounted for separately:
● 35% is used as an inventory warehouse, and the 20% is used by an employee, the CEO. This
combined 55% meets the definition of owner-occupied property (IAS40:5, 9c)). This space is
classified as property, plant and equipment.
● 45% s leased to Golden Circle and subsequently to Burger Queen SA Ltd. An assessment
needs to be made whether the leases are operating or finance leases. It is more likely that
these leases are operating leases:
◌ The lease term of 3 months and 10 years, respectively, are not substantially all of the
economic life of the building of 25 years,
◌ Ownership does not legally transfer,
◌ The space leased out is not specialised, and the lease rentals are unlikely to be
substantially
all of the fair value of the floor space.
◌ Consideration also needs to be given to whether the security service is considered ancillary
or whether this is significant. (IAS 40: 11) In this instance, the provision of security is clearly
meant to be ancillary and insignificant to the leasing arrangements as a whole.
◌ Based on the above, this space is classified as investment property.

Group financial statements of CLI

Elysium Ltd and Burger Queen SA Ltd both appear to be subsidiaries of CLI as CLI exercises
control as it owns more than 50% of the voting rights in each entity – CLI owns 80% of Elysium’s
ordinary shares and 100% of Burger Queen SA. 100% of amounts recognised by these entities
will be recognised in the CLI group financial statements.

For the three months to 31 March 20x3, 45% of the building is leased to Golden Circle Ltd, an
unrelated party; this portion meets the definition of investment property (see the discussion
above). For the remaining three months to 30 June 20x3, this 45% is owned by the group (by
virtue of Elysium) and occupied by the group (through Burger Queen SA’s set-up and
operations). It is, therefore, owner-occupied and classified as property, plant and equipment.

The remaining 55% meets the definition of property, plant and equipment (see discussion
above).
 Tutorial 11.6 Suggested solution Intermediate level

1. Properties that are occupied by the owner, from which the entity expects to receive
future economic benefits or service delivery through the use of the property by the
entity, are classified as property, plant and equipment.

Properties that are occupied by a third party, from which the entity expects to earn
income, are classified as investment property.

Properties that are held for resale or distribution are classified as inventory.

2. Give an example of each type of property and briefly explain why the specific
example given would be classified as either property, plant and equipment,
investment property, or inventory.

● Example of property classified as PPE: Entity A owns the building that is used as
the head office for administrative purposes or to produce and supply goods and
services in accordance with its mandate.

● Example of property classified as Investment property: Entity A owns a property

that it does not occupy but that is let to a variety of small business enterprises from
which it receives rental income.

● Example of property classified as inventory: Entity A owns flats or houses for future
sale, which are held primarily for sale to customers rather than for capital
appreciation or for rental income – these houses are classified as inventory.
 Tutorial 11.7 Suggested solution Advanced

1. Journal entries relating to investment:

1 February 20x11
Dr Investment in Matchmaker Ltd 333 000
([CU23 – 80c] x 15 000 shares)
Dr Dividend receivable (80c x 15 000 12 000
shares)
Cr Bank (CU23 x 15 000 shares) 345 000

30 April 20x11
Dr Investment in Matchmaker Ltd (450 12 000
new shares)
Cr Dividend receivable 12 000

Option 1: Fair value of all shares held at the date of sale

1 July 20x11
Dr Investment in Matchmaker Ltd (w1) 118 500
Cr Fair value adjustment on 118 500
investment (P/L)

Dr Bank 231 750

Cr Investment in Matchmaker Ltd (w2) 231 750

30 September 20x11
Dr Investment in Matchmaker Ltd (w3) 23 175
Cr Fair value adjustment on 23 175
investment (P/L)

w1:
Dividends: 15 000 / 100 x 3 = 450 additional shares
FV adj: ([15 000 + 450] x CU30) – CU345 000 = CU118 500
w2:
Sell: 15 450 / 2 = 7 725 shares x CU30 = CU231 750
w3:
Investment in Matchmaker Ltd at year-end: 7 725 shares x (CU 33 – CU30)
= CU23 175

Option 2: Fair value only shares sold at the date of sale

1 July 20x11
Dr Investment in Matchmaker Ltd (w4) 59 250
Cr Fair value adjustment on 59 250
investment (P/L)

1 July 2x011
Dr Investment in Matchmaker Ltd (w4) 59 250
Cr Fair value adjustment on 59 250
investment (P/L)
 Dr Bank 231 750
Cr Investment in Matchmaker Ltd (w2 231 750
above)

30 September 20x11
Dr Investment in Matchmaker Ltd (w5) 82 425
Cr Fair value adjustment on 82 425
investment (P/L)

w4:
Dividends: 15 000 / 100 x 3 = 450 additional shares
FV adj: [(15 000 + 450) x CU30]/2 – CU345 000/2 = CU59 250
w5:
Investment in Matchmaker Ltd at year-end: (7 725 shares x CU 33) – CU345 000/2=
CU82 425

2. a)

Extract from the statement of financial position of Fiddler (Pty) Ltd as at 30

September 20x11

Non-current assets
PPE:
Land and buildings (1 400 + 400) 1 800 000
Machinery 320 000
Furniture and fittings 328 021
2 441 354

Investment property 1 000 000

Investment in Matchmaker Ltd 254 925

b)

Extract from the statement of comprehensive income of Fiddler (Pty) Ltd for the
year ended 30 September 20x11

Included in other comprehensive income (OCI):

Revaluation gain on land (400 – 200) 200 000
Revaluation gain on buildings 300 000

Included in profit or loss (P/L):

Depreciation on buildings (25 000)
Depreciation on machinery (600 – 60)/9 years (60 000)
Depreciation on F&F (275 – 10) x 12/83 (38 313)
Impairment loss on machinery (40 000)
Reversal of impairment on F&F 91 334
Fair value adjustment on investment property 25 000
Cleaning expenses (120 000)
Rental income (30 000 x 10) 300 000
Gain on fair value adjustment of investment 141 675
(118 500 + 23 175) or (59 250 + 82 425)
Workings

Land Building Building Total Workings

(PPE 75%) (Invest prop
25%)
30 Sept 20X10 200 1 600 000 1 800
000 000
Revaluation 200 300 000
(begin) 000
400 1 900 000 2 300
000 000
Transfer (475 000) 475 000 ❹ 1 900 000 x 25%
Renovations 500 000 ❹
Depreciation 2011 - (25 000) (1 900 000 –
475 000 – 300
000) x 1/45 ❸
Fair value adj 25 000 ❹
30 Sept 20X11 400 1 400 000 1 000 000 ❹
000

Machinery Workings
1 Jan 20X9 611 250
Depreciation (122 500) (611 250 – 60 000) x 2 / 9 years
30 Sept 20X9 488 750
Impairment (8 750) [(600 – 60) x 2 / 9] = 120 000
[600 000 – 120 000] = 480 000 ❷
488 750 – 480 000 = 8 750 ❷
Depreciation (60 000) (600 – 60) / 9 years or
(480 000 – 60 000) / 7 ❷
30 Sept 20X10 420 000
Depreciation (60 000) (600 – 60) /9 years ❷
Impairment (40 000) (420 000 – 60 000) – 320 000 = 40 000
30 Sept 20X11 320 000

Furniture Furniture &

& Fittings Fittings (not
impaired)
1 Sept 20X9 440 000 440 000 400 000 + 40 000 ❶
Depreciation (4 479) (4 479) (440 000 – 10 000) / 8 years x 1/12 ❶
30 Sept 20X9 435 521 435 521
Depreciation (53 750) (53 750) (440 000 – 10 000) / 8 years ✓ ❶
Impairment (106 771)
30 Sept 20X10 275 000 381 771 300 000 – 25 000
Depreciation (38 313) ❶ (53 750) (275 000 – 10 000) x 12/83
Reverse imp 91 334
30 Sept 20X11 328 021 328 021