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Smithson Co purchased a new building with a 50?year life for $10 million on 1 January 20X3.
On 30 June 20X5, Smithson Co moved out of the building and rented it out to third parties on
a short?term lease. Smithson Co uses the fair value model for investment properties. At 30
June 20X5 the fair value of the property was $11 million and at 31 December 20X5 it was
$11.5 million.
What is the total net amount to be recorded in the statement of profit or loss in respect of
the office for the year ended 31 December 20X5?
A Net income $400,000
B Net income $500,000
C Net income $1,900,000
D Net income $2,000,000Six months’ depreciation should be accounted for up to 30 June 20X5, which is $100,000
expense ($10 million/50 years × 6
/12).
When the asset is transferred to investment property it should be revalued to the fair value
of $11 million. At the date that the asset’s use is changed, this gain should be recorded in
other comprehensive income and in a revaluation surplus, not in the statement of profit or
loss.
From this date, the fair value model is used. No depreciation is accounted for, but the asset
will be revalued to fair value with gains or losses going through the statement of profit or
loss. Asthere is a gain of $500,000 from June 20X5 to December 20X5, this would be included
in the statement of profit or loss.
Therefore the total net income will be $400,000, being the $500,000 fair value gain less the
depreciation expense of $100,000 for the first 6 months of the year.THE previous question is Q 13
Q 15Croft acquired a building with a 40?year life for its investment potential for $8 million on
1 January 20X3. At 31 December 20X3, the fair value of the property was estimated at
$9 million with costs to sell estimated at $200,000.
If Croft Co uses the fair value model for investment properties, what gain should be
recorded in the statement of profit or loss for the year ended 31 December 20X3?ANS FOR 15
$1,000,000
The fair value gain of $1 million ($9m – $8m) should be taken to the statement of profit or
loss. Costs to sell are ignored and, since Croft uses the fair value model, no depreciation will
be charged on the buildingHello Tutor
i have a doubt that in q 13 we calculated the depreciation but in q 15 we didn’t even though in both the question fair model is used my question is
1. Why is the depreciation calculated for q1 3 even tho smithson rented their property for short term lease which is a operating lease , please rectify my approach to this questions .
2. How to recognize when an item is leased for operating and when for finance .Your help will add immense value
Hi,
In the first question, there is a change in use of the asset from PPE to IP and so the asset is depreciated per IAS 16 before either is the transferred to IP and held under the FV model under IAS 40.
There are no longer operating or finance leases under IFRS 16 for the lessee. All leases are recognised on the SFP but there is an option to treat as a short term lease. There still exists the finance/operating lease classication for lessor accounting with the rules the same regarding the risk and rewards of ownership. If transferred to the lessee then it is a finance lease.
Thanks.
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