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9 PACKET
MODULE 10
AE 15 and ELEC 1 – INTERMEDIATE ACCOUNTING
9 INVESTMENT PROPERTY
MODULE 10

9
Welcome to Module 10
In this module, we will discuss the measurement of investment property. At the end of this module, you
will be answering multiple choice questions and straight problems.

CONSULTATION HOURS:
Virtual time: During your class schedule (either Monday or Tuesday)
Phone or Messenger: Every Thursday from 8am to 11am and 1pm to 4pm

9 LEARNING OBJECTIVES:
MODULE 10
By the end of this module, the students will be able to:
1. Understand the nature and purpose of investment property
2. Distinguish investment property and owner-occupied property
3. Know the initial and subsequent measurement of investment property

9
COURSE CONTENT FOR MODULE 10:

ACTIVITY DESCRIPTION TIME TO COMPLETE

Assigned Reading Investment Property and other Investments 1.5 hours

Lecture discussion Recap of Different Types of Investments 1.5 hours

9
ACTIVITY 10 Problem Solving 1.5 hours

Summative quiz for module 10 (to be

Quiz 1.5 hours
announced)

9 will be due on
Answers to ACTIVITY 10 , 2020 thru Google
NEO LMSClassroom or
Facebook Groups. Correct answers will be posted thereafter for your reference.

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LECTURE DISCUSSIONS

9.1 INVESTMENT PROPERTY

10.1

Investment property is property (land or building or part of a building or both) held by an owner or by the
lessee under 18 months please to earn rentals or for capital appreciation or both. An equipment or any
movable property cannot qualify as investment property.
An investment property is not held:
a. for use in the production or supply of goods or services or for administrative purposes
b. for sale in the ordinary course of business
The above properties are known as owner-occupied property.

Examples of investment property:

a. Land held for long-term capital appreciation
b. Land held for a currently undetermined use
c. Building owned by the reporting entity leased out under an operating lease
d. Building that is vacant but is held to be leased out under an operating lease
e. Property that is being constructed or developed for future use as investment property
Items not considered investment property
a. owner-occupied property or property held for use in the production or supply of goods or services
or for administrative purposes
b. property held for future use as owner-occupied property
c. property held for future development and subsequent use as owner-occupied property
d. property occupied by employees, whether or not the employees pay rent at market rate
e. owner-occupied property awaiting disposal
f. property held for sale in the ordinary course of business or in the process of construction or
development for such sale
g. property being constructed or developed on behalf of third parties
h. property that is leased to another entity under a finance lease
Investment property held by lessee
The new standard on leases, requires a lessee to recognize a right of use asset and a lease liability. The
“right of use” asset is initially recognized at cost which includes the following:
a. the present value of the lease payment
b. lease payment made to the lessor at or before commencement date less any lease incentive
c. initial direct costs incurred by the lessee
d. estimate of cost of dismantling and restoring the underlying asset for which the lessee has a present
obligation
Investment property shall be recognized as an asset when and only when its cost can be measured
reliability and it is probable that economic benefits that are associated with the investment property will
flow to the entity.
Investment property = purchase price + directly attributable expenditure

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Costs excluded from cost of investment property:

a. start-up costs, unless necessary to bring the property to the condition necessary for its intended
use
b. operating losses incurred before the investment property achieves the planned level of occupancy
c. abnormal amounts of wasted material, labor or resources incurred in constructing or developing
the property
Subsequent measurement
a. Fair value model - the investment property is carried at fair value. If a lessee applies the fair value
model in measuring investment property, the lessee shall also apply the fair value model to the
right of use asset that meets the definition of investment property.
If an office is leased on a furnished basis, the fair of the office generally includes the fair value of
equipment (lift or air-conditioning units as integral parts of a building) and of the furniture because
the rental income relates to the furnished office.
If there is clear evidence that the fair value of the investment property cannot be determined reliably
on a continuing basis, the cost method shall be used until the disposal of the investment
property. Under such exceptional cases, the residual value of the property shall be assumed to
be zero. Other investment properties not affected by such exceptional cases shall continue to be
measured at fair value.
b. Cost model - the investment property is carried at cost less any accumulated depreciation and any
accumulated impairment loss
Partly investment and partly owner-occupied
Certain properties may include a portion that is held to earn rentals or for appreciation and another portion
that is held for manufacturing or administrative purposes.
If these portions could be sold or leased out separately, an entity shall account the portions separately as
investment property and owner-occupied property.
When is it investment property?
a. If the portions could not be sold separately and only an insignificant portion is held for manufacturing
or administrative purposes.
b. When ancillary services are provided by the entity to the occupants of the property and these
services are a relatively insignificant component of the arrangement. (provision by the owner of
security and maintenance services to the lessees). Provision of hotel services by the owner of the
hotel is treated as owner-occupied property.
Property leased to an affiliate
From the perspective of the individual entity that owns it, the property leased to another subsidiary or its
parent is considered an investment property.
However, from the perspective of the group as a whole and for purposes of consolidated financial
statements, the property is treated as owner-occupied property.

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An entity ventured into construction of a shopping mall in the Philippines for purposes of earning rentals
from tenants. The construction was completed and the
property was placed in service on January 1, 2019.

prop erty The cost of construction of the shopping mall was

e nt P100,000,000 with useful life of 10 years and residual
Inve stm value of P10,000,000.
An independent valuation expert provided the following fair
value as follows:
December 31, 2019 120,000,000
December 31, 2020 125,000,000
December 31, 2021 115,000,000

Cost Model FAIR VALUE MODEL

To record the acquisition of the investment property
Investment Property 100,000,000 Investment Property 100,000,000
Cash 100,000,000 Cash 100,000,000
To record the subsequent annual depreciation No depreciation is recorded for the investment
Depreciation 9,000,000 property, but changes in fair value from year to year are
Accumulated Depreciation 9,000,000 recognized in profit or loss
The fair value of the investment property is Investment Property 20,000,000
disclosed every year-end Gain from change in fair value 20,000,000
Investment Property 5,000,000
2019: 120M – 100M
2020: 125M – 120M
Gain from change in fair value 5,000,000
2021: 115M – 125M Loss from change in fair value 10,000,000
Investment Property 10,000,000

Transfers of investment property

Transfers to and from investment property shall be made when and only when there is a change of use
evidenced by:
a. Commencement of owner occupation or development with view to owner-occupation – transfer
from investment property to owner-occupied property
b. Commencement of development with a view to sale – transfer from investment property to inventory
c. End of owner occupation – transfer from owner-occupied property to investment property
d. Inception of an operating lease to another entity – transfer from owner-occupied property to
investment property

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Measurement of transfers

1. When the entity uses the cost model, transfers between investment property, owner-occupied
property and inventory shall be made at carrying amount.
2. A transfer from investment property carried at fair value to owner-occupied property or inventory
shall be accounted for at fair value which becomes the deemed cost for subsequent accounting.
3. If owner-occupied property is transferred to investment property that is to be carried at fair
value, the difference between the fair value and the carrying amount of the property shall be
accounted for as revaluation of property plant and equipment.
4. If an inventory is transferred to investment property that is to be carried at fair value, the
measurement of fair value shall be included in profit or loss.
5. When an investment property under construction is completed and to be carried at fair value, the
difference between fair value and carrying amount shall be included in profit and loss.

An investment property shall be derecognized

1. On disposal
2. When the Investment property is permanently withdrawn from use
3. When no future economic benefits are expected from the investment property

The general disclosures are:

1. Whether the entity uses the cost model or fair value model
2. The amount of rental income with the related expense
3. Restrictions on the investment property
4. Contractual obligations to purchase or construct investment property

Cash surrender value

The life of officers may be insured by the entity and name itself as beneficiary.

If the beneficiary is the officer insured or any person like the wife of the officer, no accounting problem is
encountered because the payment of the premium is simply charged to insurance expense.

If the beneficiary is the entity itself, the life insurance policy is considered to have a cash surrender value
and loan value.

Cash surrender value is the amount which the insurance firm will pay upon the surrender and cancelation
of the life insurance policy. It arises if the following requisition are present:
1. The policy is a life policy. There is no cash surrender value in fire, accident and other nonlife
policies.
2. Premiums for three full years must have been paid.
3. The policy is surrendered at the end of the third year or anytime thereafter

A cash surrender value legally commences to accrue at the end of the third year. However, there are
certain insurance firms which sell life insurance policies that grant cash surrender value even at the end of
the second year only. Cash surrender value is classified as noncurrent investment.

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If dividends are received from the life policy, this is not an income but a reduction of life insurance expense.

A loan value is the amount the insured can borrow from the insurance firm with the cash surrender value
as collateral security. The loan shall not be deducted from the cash surrender value but accounted for as
an ordinary obligation.

The cash surrender value of a life policy arises from the fact that the fixed annual premium is much in
excess of the annual risk during the earlier years of the policy.

The excess is necessary in order to balance the deficiency of the same premium to meet the annual risk
during the later years of the policy.

Excess in the premium paid over the annual cost of insurance, with accumulated interest = cash surrender
value

Illustration: An entity insured the life of the president for P2,000,000 with the entity being the beneficiary.
The annual premium is P30,000. In 2019 and 2020, there were no cash surrender values. 2021, 2022
and 2023 had the following cahs surrender values, respectively: P30,000; P42,000; and P58,000.

The president died on June 30, 2023 and the policy was collected on July 31, 2023.

Payment of the insurance premium Life insurance expense 30,000

(entries for 2019 to 2021) Cash 30,000
Initial recognition of the cash surrender value Cash surrender value 30,000
at the end of the third year (Dec. 31, 2021) Life insurance expense (1/3) 10,000
Retained earnings (prior 2 yrs) 20,000
The initial cash surrender value is regarded as applicable to three years of the life policy. That
portion of the cash surrender value applicable to the current year is credited to life insurance
expense and that portion applicable to the prior years is credited to retained earnings. Balances 12/31
Jan. 1, 2022 - Payment of the insurance Life insurance expense 30,000 2022 42,000
2021 30,000
premium Cash 30,000 Increase
Dec. 31, 2022 - Recognition of the cash Cash surrender value 12,000 In CSV 12,000
surrender value subsequent to the third year Life insurance expense 12,000
Jan. 1, 2023 - Payment of the insurance Life insurance expense 30,000 Balances 12/31
premium Cash 30,000 2023 58,000
June 30, 2023 - Recognition of the cash Cash surrender value 8,000 2022 42,000
Increase
surrender value subsequent to the third year Life insurance expense 8,000 In CSV 16,000
Receipt of the proceeds of the life policy. Cash 2,000,000 Divide by 2
The amount credited to the cash surrender Cash surrender value 50,000
value is the adjusted balance at the time of Life insurance expense 15,000
death of the insured. Gain on life insurance settlement 1,935,000

Face of policy 2,000,000

Cash surrender value ( 50,000) 30,000+12,000+8,000
Unexpired premium (30,000 x 6/12) ( 15,000)
Gain on life insurance settlement 1,935,000

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More on Investment Property:

https://www.youtube.com/watch?time_continue=20&v=ow5mnxqr3XQ&feature=emb_logo

ACTIVITY 9
10
Problem 1
Glay company ventured into construction of a condominium in Makati which was completed and placed
in service on January 1, 2019. The cost of construction was $1,000,000 with a useful life of 25 years and
a residual value of $100,000.
An independent valuation expert provided the following fair values for December 31 2019, 2020 and
2021, respectively: $1,100,000, $1,060,000, and $1,200,000.
Prepare journal entries for 2019, 2020 and 2021 if the investment property is accounted for under:
a. the cost model
b. the fair value model

Problem 2. Walter Company purchased an investment property on January 1, 2016 for P2,200,000 with
a useful life of 40 years. On December 2018, it had a fair value of P3,000,000 and was sold for net
proceeds of P2,900,000. The cost model was used to account for the investment property.

1. What is the carrying amount of the investment property on December 31, 2018?

2. What is the gain or loss to be recognized for the year ended December 31, 2018 regarding the
disposal of the property?

3. If Walter Company used the fair value method, what is the gain or loss to be recognized in 2018?

Problem 3. Sylar Company insured the life of its president for P1,000,000, with it being the beneficiary.
The annual premium is P40,000 and the policy is dated January 1, 2016. The cash surrender values are
P15,000 for December 31, 2018 and P19,000 for December 31, 2019. The president died on September
30, 2019 and the policy was settled on December 31, 2019.

4. What is the gain on life insurance settlement?

5. What is the life insurance expense for 2019?

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