UNIT 1 AUDIT OF INVESTMENT PROPERTY, NON CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS Estimated Time:

2.5 HOURS
*Use Louwers 4th edition

Discussion Questions 1- 1: Nature of Investment Property

1. Define investment property and owner-occupied property. 2. What are the initial recognition criteria for investment property? How should it be measured initially and subsequently? 3. Considering the nature, initial recognition and subsequent measurement of investment property, what are the usual assertions tested with regard investment property? 4. Referring to question #3, enumerate possible risks for each assertion.

Discussion Question 1-2: Substantive Procedures over Investment Property*

Refer to Louwers Question 8.47 page 338.
*Property, plant and equipment terms are assumed to be investment property

Problem 1-1: Investment Property and Owner Occupied Property

Identify the proper classification of the following items: 1. land held for long-term capital appreciation rather than for short-term sale in the ordinary course of business. 2. land held for a currently undetermined future use. (If an entity has not determined that it will use the land as owner-occupied property or for short-term sale in the ordinary course of business, the land is regarded as held for capital appreciation.) 3. a building owned by the entity (or held by the entity under a finance lease) and leased out under one or more operating leases. 4. a building that is vacant but is held to be leased out under one or more operating leases. 5. property that is being constructed or developed for future use as investment property. 6. property intended for sale in the ordinary course of business or in the process of construction or development for such sale 7. property being constructed or developed on behalf of third parties 8. property held for future use as owner-occupied property 9. property held for future development and subsequent use as owner-occupied property, 10. property held for future development and subsequent use to be occupied by employees 11. property that is leased to another entity under a finance lease.

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Problem 1-2: Investment Property

ABC Co. has the following assets: Particulars Land held for long-term capital appreciation Land held for a currently undetermined future use Land held for future plant site Land held for sale in ordinary course of business Building rented out under finance lease Building rented out under operating lease Building held under an operating lease Building held under finance lease and rented out under operating lease Equipment leased out under an operating lease Requirement: Determine the total investment property. Amount 200,000 700,000 1,000,000 100,000 1,900,000 800,000 1,100,000 1,200,000 50,000

Problem 1-3: Investment Property and Owner Occupied Property

DEF Co. has the following assets: Particulars Vacant building to be leased out under operating lease Building being constructed for XYZ, Inc. Building under construction to be used as office Building under construction to be rented out under operating lease Building rented out to DEFs employees who pay rent at market rates Office building awaiting disposal Requirement: Determine the total investment property. Amount 1,000,000 200,000 400,000 100,000 800,000 50,000

Problem 1-4: Property that is partly investment property and partly-owner occupied

A. Portions sold separately GHI Co. has a 10-storey condominium building with a carrying amount of P4,000,000. The first 4 floors are being rented out to tenants under operating lease and the rest are used as office space. Each portion of the building can be sold separately or leased out separately under finance lease. Assuming that the fair values of the condominium units are approximately equal, how much is classified as investment property and how much is classified as owner-occupied property? B. Portions not sold separately JKL Co. owns a 100,000 square meter mall. The rentable space is 80,000 square meters. However, a 10 square meter space is occupied as an administration office. The carrying amount of the building is P10,000,000. Requirement: How much is classified as investment property and how much is classified as owner-occupied property?
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Problem 1-5: Investment Property and Owner Occupied Property

AY Company, wholly-owned corporation of BSP Company, is engaged in various businesses namely real estate development, leasing, and food court operations. The valuation of investment property in AY Companys December 31, 2014 statement of financial position amounted to P21,504,300. Supporting schedule of the Company presents the following composition: Particulars A large open space is leased by AY Company under operating lease and is leased out to third parties under operating lease A building held under a finance lease that is used for food court operations. The building is divided into different food stalls with kitchen space and is leased out to various entrepreneurs Building held primarily for sale Property being constructed for future use as investment property A piece of land owned whose title is leased to a third party under finance lease A piece of land owned whose title is leased to a third party under operating lease Land for undetermined future use Property that is being developed for sale Property owned used for administrative purposes Total Amount P 4,600,000 3,800,000 3,000,000 2,700,000 2,300,000 1,502,300 1,402,000 1,200,000 1,000,000 P 21,504,300

After your audit, what amount should be presented as part of investment property and owner occupied property in ABC Companys statement of financial position? Prepare adjusting entries to correct the misclassification of various properties in the books of ABC Company. (Assuming lease payments totaling P1,000,000 for the property leased out under finance lease are recorded as rental income and depreciation already ceased upon inception of the lease)

Problem 1-6: Investment Property and Owner Occupied Property

The consolidated statement of financial position of Pepe Le Pew Company and subsidiaries provides the following information in relation to its Investment Property as of December 31, 2014: Property held by a subsidiary of Pepe Le Pew, a real estate firm, in the ordinary course of business Land held by Pepe Le Pew for undetermined use Property under construction for use as investment property Land held for future use as factory site Building awaiting disposal Machinery leased out by Pepe Le Pew to a third party under an operating lease Equipment leased out by Pepe Le Pew to a third party under a finance lease Machinery awaiting disposal Building owned by a subsidiary of Pepe Le Pew and for which the
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3,500,000 4,350,000 6,700,000 5,200,000 1,120,000 590,000 710,000 345,000 3,890,100

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subsidiary provides security and maintenance services to the lessees Land leased by Pepe Le Pew to a subsidiary under an operating lease Land leased by Pepe Le Pew to a subsidiary under a finance lease A vacant building owned by Pepe Le Pew and to be leased out under an operating lease Property held by Pepe Le Pew for use in production Building held by Pepe Le Pew under a finance lease currently being leased out to a third party Property leased by Pepe Le Pew from its subsidiary under a finance lease Property being constructed on behalf of Sniffles, an outside company Total Investment Property Required:

2,200,000 2,340,000 5,500,000 1,750,000 4,150,000 5,263,000 2,400,000 P 50,008,100

Compute for the correct balance of Investment Property to be reflected in the consolidated statement of financial position of Pepe Le Pew Company and subsidiaries as of December 31, 2014.

Problem 1- 7: Initial Recognition of Investment Property, Various Measurement Issues

Yu, Wei, Sy & Co., a public accounting firm, is engaged to audit Spy Company, a family owned corporation. During the year, they entered into the following transactions: On January 10, 2014, the Company purchased a building for undetermined future use amounting to P10,520,000. Incidental costs incurred for the acquisition amounted to P123,000. On February 8, 2014, the Company exchanged an owner-occupied property with cost and accumulated depreciation amounting to P20,000,000 and P542,000, respectively, for a land and building with combined fair value of P27,420,800 primarily held for capital appreciation. The exchange is considered to be of commercial substance. On March 15, 2014, the Company exchanged another owner occupied property with carrying value of P22,380,000 for a land with undetermined future use. The exchange is without commercial substance. On June 30, 2014, it purchased a piece of property (land and building) at an installment price of P100 million. The appraised value of land and building are P30,000,000 and P40,000,000, respectively. The Company made a down-payment of 10%, and issued a non-interest bearing note payable at the end of each year for 9 years (P10 million each). As of the transaction date, the market rate for 9 years is 12%. Annual real property tax of P100,000 was assumed by the Company. Apart from this, the YWS Company also paid brokers commission, legal costs, and other direct taxes amounting to P50,000. On December 1, 2014, the Company issued 20,000 of its own capital stock in exchange of a building to be leased out under operating leases. The par value and market value per share amounted to P30 and P120, respectively.

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Required: a. Prepare the journal entries to record the enumerated transactions. b. For purposes of the December 31, 2014 statement of financial position, what is the carrying value of the investment property (assuming the initial acquisition cost is still the fair value as of year-end)?

Problem 1-8: Subsequent Measurement after Acquisition; Change in measurement model

Captain Barbel & Co. is the external auditor of Green Lantern Inc. During the audit fieldwork, it was found out that the clients investment property is still carried at its initial cost of P2,400,000. The said property was acquired last June 30, 2014. Further examination disclosed the following: Fair Value as of 12/31/2014 Useful Life Required: a. Assuming the fair value model was used, how much is the carrying value of the investment property as of December 31, 2014? How much gain (income)/loss (expense) should be recognized in profit or loss? b. Assuming the cost model was used, how much is the carrying value of the investment property as of December 31, 2014? Will there be any gain (income)/ loss (expense) to be recognized in profit or loss? c. Assuming the fair value of the property as of 12/31/2015 permanently declined to P1,500,000: a. How much loss should be recognized under the fair value model? b. How much loss should be recognized under the cost model? c. How much is the carrying amount of the investment property under fair value model? Cost model? P2, 600,000 8 years

Problem 1 9: Disposal and Derecognition of Investment Property and Related Gain/Loss on Disposal
On June 30, 2014, Valor Company sold its investment property for P16,255,000 net of transaction costs amounting to P155,000. The property was initially acquired at a cost of P12,250,000 excluding transaction cost of P125,000. Useful life is estimated to be 10 years. The property is already held by the Company as investment property for 2 years. Since last re-measurement date, the fair value of the investment property P16,150,000. Required: a. Under fair value model, how much gain/loss on sale should be recognized by the Company? b. Under cost model, how much gain/loss on sale should be recognized? c. Ignoring the effect of deprecation, prepare an analysis showing the total impact of all investment property related transactions on Valor Companys net income for the period ended December 31, 2014 under (a) fair value model and (b) cost model.
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Problem 1 10: Transfers from/into Investment Property, Various Measurement Issues

Consider the following independent cases: a. DBS Corporation, real estate developer, acquired investment property at a total cost of P5,000,000. The investment property is accounted for under the fair value model. At December 31, 2014, fair value of the investment property is P6,500,000. On March 30, 2014, DBS Corporation decided to use the property for their operations. The fair value of the investment property amounted to P6,700,000 at conversion date. Required: Prepare necessary journal entries to record the conversion Assuming value at conversion date amounted to P4,800,000, what are the entries to record the transfer? b. Banihit Corporation acquired a land primarily used for operations at a total cost of P5,000,000. On March 30, 2014, Banihit Corporation decided to hold the land for capital appreciation. The fair value of the investment property amounted to P6,700,000 at conversion date. Per Companys existing accounting policies, the investment property should be carried at fair value. Required: Prepare necessary journal entries to record the conversion Assuming value at conversion date amounted to P4,800,000, what are the entries to record the transfer? c. Acosta Corporation, real estate developer, acquired investment property at a total cost of P5,000,000. The investment property is accounted for under the cost model. On March 30, 2014, Acosta Corporation decided to use the property for their operations. The fair value of the investment property declined to P4,700,000 at conversion date. Required: Prepare necessary journal entries to record the conversion Assuming the property was initially classified as owner-occupied property, prepare necessary journal entries to record the conversion

Problem 1-11: Audit Working Paper Preparation

SPA & Company was appointed as the auditor of DMCG Corporation for the year ended December 31, 2014. Upon examination of the 2010 audited financial statements, the balance presented under investment property totaled P34,382,665. However, the audit team noted that the beginning balance per general ledger amounted to P26,280,665. Review of prior year working papers revealed the following:

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a. Beginning balance per books and per audit as of January 1, 2013 amounted to P18,380,775. b. The client-corporation committed various errors in the recording of newly acquired investment properties. Test of additions working paper contains the following:
Property Land 1 Land 2 Bldg 1 Bldg 2 Total Initial Cost P4,820,000 5,222,000 3,920,000 8,965,000 22,927,000 Transaction Costs P180,000 130,000 80,000 150,000 540,000 Amount Capitalized P4,820,000 5,352,000 4,720,000 9,115,000 24,007,000 Outstanding Payable 3,200,000 4,852,000 2,800,000 8,900,000 19,752,000

c. Working paper on test of disposal disclosed the following information:

Property Land 3 Land 4 Bldg 3 Bldg 4 Total Cost 1,300,000 2,300,000 4,000,000 2,800,000 10,400,000 Valuation Adjustment (100,000) (700,000) 780,000 (100,000) (120,000) Derecognized Value 1,300,000 1,600,000 4,000,000 2,700,000 9,600,000 Recognized Gain/(Loss) 500,000 200,000 (200,000) 300,000 800,000

d. Test of valuation working paper showed that fair value loss amounting to P6,507,110 was booked by the client-corporation while fair value gain were still unrecorded. e. Apart from those mentioned above, no other transactions affected the investment property account. Required: (a) Prepare an audit working paper to reconcile the beginning balance of investment property per books and the final prior year audited balance. Indicate the adjusting journal entries to be proposed for purposes of the current year audit. (b) Answer the following: a. How much is the carrying amount of the investment property prior to valuation adjustment? b. How much is the correct balance of realized gain or loss on disposal of investment property? c. How much is the unrecorded fair value gains in the books of the Company?

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PART II: NONCURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

Discussion Questions 1-1: Nature of Noncurrent Assets Held for Sale and Discontinued Operations
1. Define the following terms: a. Noncurrent assets held for sale b. discontinued operation c. component of an entity 2. What are the initial recognition criteria noncurrent assets held for sale? How should it be measured initially and subsequently? 3. If a noncurrent asset (or disposal group) is to be abandoned, can it be classified as held-for-sale in accordance with PFRS 5? What if the said abandoned property is also a discontinued operation, can it be classified as such in accordance with PFRS 5?

Problem 1-1: Classifying assets as held for sale

Sir Cheng, Inc. is committed to a plan to sell its headquarters building and has initiated actions to locate a buyer. Required: Under each condition, determine whether it can be classified as held for sale or not. a. SCI intends to transfer the building to a buyer after it vacates the building. The time necessary to vacate the building is usual and customary for sales of such assets. b. SCI will continue to use the building until construction of a new headquarters building is completed. The entity does not intend to transfer the existing building to a buyer until after construction of the new building is completed (and it vacates the existing building). Problem 1-2: Timing of Recognition of Noncurrent Assets Held for Sale and Presentation

of Discontinued Operations

JK Company is a wholly owned subsidiary of a Group that manufactures footwear. It follows the calendar year for financial reporting. JK Company has two manufacturing plant facilities, namely leisure flip flops segment and athletic rubber shoes segment. This footwear Company has been running in the red brought about by the flooding of cheap footwear imported from China and increased production costs in Marikina due to inflation rates. Therefore, following a special meeting on January 15, 20x0, the Groups management, Board of Directors and stockholders decided to dissolve JK Company in the following manner: 1. The athletic rubber shoes plant is to be sold to a local competitor. The company has initiated an active program to locate the buyer. The Company currently has a commitment to supply fifty (50) pairs of basketball rubber shoes to DLSUs Green Archer Team before the start of the UAAP season, May 31, 20x0. This commitment is required before transfer of assets maybe fulfilled; 2. The leisure flip flops plant is to be abandoned on April 30, 20x0 due to lack of active market of its identifiable assets. This segment will continue to fulfill existing orders and collect debtors, but will not accept any new orders.
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Required: a. What date can the Athletic Rubber Shoes asset segment be classified as Noncurrent Asset Held for Sale? What period (from January 1 to which date) would the Income Statement cover the related discontinued operations of this segment? b. What date can the Leisure flip flop asset segment be classified as Noncurrent Asset Held for Sale? What period (from January 1 to which date) would the Income Statement cover the related discontinued operations of this segment?

Problem 1-3: Noncurrent assets held for sale, measurement issues

On June 1, 2013, Mariano Corporation has a building with a cost of P40,000,000 and accumulated depreciation of P31,000,000. The company commits to plan to sell the said asset by January 1, 2014. On June 1, 2013, estimated selling price is P7,000,000 (gross of 5% selling costs of net selling price). On December 31, 2013, the estimated selling price of the said asset has increased to 7,500,000 (net of 5% selling costs). Required: a. At the time of recognition of noncurrent assets held for sale, what amount should the noncurrent asset held for sale be recognized? b. What amount of loss should be recognized at the time of reclassification? c. As of December 31, 2013, what is the carrying value of the noncurrent asset held for sale d. On December 31, 2013, what amount of gain or remeasurement should be recognized?

Problem 1-4: Disposal Group as Held for Sale; Measurement issues

Reyes Inc. plans to sell a group of its assets and classifies it as held for sale. The following assets form the disposal group: Goodwill Property Plant and Equipment, carried at fair value Property Plant and Equipment, at depreciated amount Inventory Investment in available for sale Total P 4,000,000 9,000,000 2,000,000 4,400,000 3,600,000 23,000,000

Net Realizable value of the inventory is estimated to be P400,000 lower than the carrying amount and that the remeasured value of the property plant and equipment carried at fair value is P8,000,000. Reyes Inc. estimates that the fair value less costs to sell of the group amounts to P16,200,000.

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The Companys Accountant allocated Impairment loss as follows: Goodwill Property Plant and Equipment, carried at fair value Property Plant and Equipment, at depreciated amount Inventory Investment in available for sale Total P 1,182,609 2,660,870 591,304 1,300,870 1,064,347 6,800,000

Required: a. Is the allocation made by the Company correct as to impairment loss? b. What amount of loss to be recognized before classification as held for sale? c. What amount of loss to be recognized after classification as held for sale? d. Prepare a working paper to show the allocation of impairment loss e. Prepare compound entry to correct the allocation of impairment loss

Problem 1-5: Noncurrent Asset Held For sale, Extended Period

On July 20x1, OP Company is committed to a plan to sell a disposal group that represents a significant portion of its regulated operations. The sale requires regulatory approval, which could extend the period required to complete the sale beyond one year. Actions necessary to obtain that approval cannot be initiated until after a buyer is known and a firm purchase commitment is obtained. However, a firm purchase commitment is highly probable within one year. The noncurrent assets of disposal group have a carrying value of P4 million and liabilities of P1 million. The total fair market value as of December 31, 20x1 of the disposal group is P4.8 million. If the sale is completed within one year, the estimated cost to sell is P200,000 but if the sale will extend beyond one year, the present value of the estimated cost to sell is P180,000. Required: If the sale will extend beyond one year, what amount of noncurrent asset should OP Company report its held for sale property at December 31, 20x1?

Problem 1-6_Discontinued Operations

On June 1, 20x1, AGI committed to sell one of its geographical segments which can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the company. This is expected to be finalized on January 20, 20x2. On December 31, 20x1, the carrying value of the segment is P3,000,000 and the fair value less cost to sell is P2,800,00. During 20x1, severance and relocation costs amounting to P200,000 was incurred due to the discontinued operations. Revenues and expenses relating to the discontinued segment during 20x1 were as follows: January 1 to June 1 June 1 to December 31 Revenues 3,000,000 1,200,000 Expenses 5,000,000 1,600,000

Initial draft of financial statements showed that the loss from discontinued activities only amounted to P800,000, gross of tax. Corporate tax rate is 30%. Required: Compute for the following amounts:

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a. Prepare a working paper to outline the amount of loss to be reported from discontinued activities. a. Carrying value of the discontinued segment as of December 31, 20x1 b. Loss from ordinary activities of the discontinued segment b. Difference, if there are any, between loss per audit and loss per initial draft financial statements shall be reconciled. What is the most probable cause of the committed error?

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