ACYFAR3

PRACTICE SET – PART 1

Unit 1 – Accounting for Investment Property

EXERCISE 1 – True or False

1. Vacant building held to be leased out under a finance lease is an example of

investment property.
2. A property being constructed or developed on behalf of third parties is not an
example of investment property.
3. Investment property is initially measured at cost, including transaction and start-up
costs.
4. Subsequent measurement of investment property is either cost model or revaluation
model.
5. Transfers to or from investment property classification is allowed if there is a change
in fair value.
6. Owner-occupied property is a property held for sale in the ordinary course of business
or in the process of construction or development for such sale.
7. For transfer from inventories to investment property at fair value, any difference
between the fair value at the date of transfer and it previous carrying amount should
be recognised in net profit or loss for the period.
8. The gain or loss on disposal of investment property should be calculated as the
difference between the net disposal proceeds and the carrying amount of the asset
and should be recognised as income or expense in the income statement.

EXERCISE 2 – Problem Solving

1. The balance of the investment property of ANIMO Company, in its unaudited statement of
financial position, is P52,700,000. The composition of the balance is as follows:

Land held for undecided future use P20,000,000

Property held for administrative purposes 6,000,000
Land held for long term capital appreciation 10,000,000
Existing investment property that is being redeveloped for
continuing use as investment property 15,000,000
Factory building awaiting disposal 1,700,000
Total P 52,700,000

The company adopted, as an accounting policy, the fair value model. The amounts above are
in its fair value.

What is the total amount that should be reported as investment property?

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2. On January 1, 2024, a land with an old building was acquired by ANIMO Company for
P6,300,000. On the acquisition date, the fair value of the land was P4,500,000 and the fair
value of the building was P1,800,000. The old building was demolished at a cost of P615,000
shortly after acquisition. A new building was constructed for P4,950,000 plus the following
costs:
Excavation fees 570,000
Architectural design fees 165,000
Building permit fees 37,500

The building was completed and occupied on June 30, 2024. The land was acquired and the
building was constructed for the purpose of earning rentals under an operating lease. The
company adopted the fair value model as an accounting policy. The fair values of both land
and building are as follows:
Land Building
31-Dec-24 7,000,000 5,700,000

How much should ANIMO Company recognize as net unrealized gain or loss on investment
property on its December 31, 2024 income statement? (Indicate whether it is a net gain or net
loss)

3. ANIMO, Inc. completed the construction of a building at the end of 2022 for a total cost of
P20,000,000. The building is estimated to be economically useful for 22 years. The building
was constructed for the purpose of earning rentals under operating leases. The tenants
began occupying the building after its completion. The company opted to use the fair value
model to measure the building. An independent valuation expert was used by the company
to estimate the fair value of the building on an annual basis. According to the expert the fair
values of the building at the end of 2022, 2023 and 2024 were P22 million, P23 million and
P25 million, respectively.

The company’s business expanded in 2023. As a result, the company started to use the
building in its operations on January 1, 2024. Because of the change in use, the company
reclassified the building from investment property to property, plant and equipment.

a. How much should be the revaluation surplus the company record on the date of
reclassification?
b. How much is the carrying value of the building on December 31, 2024?

4. ANIMO, Inc. owns a building purchased on January 1, 2020 for P10 million. The building
was used as the company’s head office. The building has an estimated useful life of 25
years. In 2024, the company started transferring its head office to another building. ANIMO
decided to lease out the building on December 27, 2024 and the tenants began occupying
the old building by the end of 2024. On December 31, 2024, the company reclassified the
building as investment property to be carried at fair value. The fair value on date of
reclassification was P8.5 million.

As a result of the transfer from owner – occupied to investment property, how much
revaluation surplus ANIMO should record?

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 Unit 6 – Accounting for Non-Current Liabilities

Problem Solving

1. ANIMO Company issued P10,000,000 bonds on bond issue date, December 31, 2020. The
bonds pay interest annually at 8% on the outstanding bond balance. The face value of the
bonds is payable in installment of P2,000,000 every December 31, starting 2021. The bonds
were sold at a price that will yield 12%.

How much is the issue price of the bonds?

2. On January 1, 2020, ANIMO Corporation issued 3,000 of its 8%, P1,000 face value bonds at
11% prevailing market rate of interest. Interest is payable semiannually on June 30 and
December 31. The bonds mature on December 31, 2024. On September 30, 2021, the bonds
were retired at 90 including accrued interest.

How much is the gain on early retirement of the bonds?

3. On December 31, 2020, ANIMO Company acquired equipment for P8M. ANIMO Company
paid P2,000,000 down and signed a non–interest bearing note for the balance which is
payable in installments every December 31 of each year as follows.

2021 P1,300,000
2022 2,600,000
2023 2,100,000

Assume prevailing interest rate on December 31, 2020 is 14%.

a. How much is the interest expense recognized in 2021?

b. The carrying value of the note at the end of 2022 is?

4. On January 1, 2021, ANIMO Corporation issued 2,000 of its 8%, P1,000 face value bonds at
10% prevailing rate of interest. Interest is payable semiannually on July1 and January 1.
The bonds mature after 5 years. ANIMO paid bond issue cost which was appropriately
recorded as a deferred charge. The effective interest after the bond issue cost is 13%.

How much is the bond issue cost?

5. On January 1, 2021, ANIMO Company issued 4,000 of its 10%, 5-year P1,000 face value
bonds with detachable warrants at 110. Each bond carried a detachable warrant to acquire
10 shares of ANIMO Company’s P50 par value ordinary shares at a specified option price of
P70 per share. At the date of issuance, the market rate of the bonds without the warrants is
at 11% and the market value of the warrants were ascertained to be at P500,000.

On December 31, 2021, three-fourths of the total bondholders exercised the warrants.
During this time, the bonds had a fair value of P3,900,000 without the warrant and the fair
value of the entity’s shares amounted to P90 per share.

How much of the proceeds from the issuance should be allocated to the equity component?
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6. On December 31, 2021, ANIMO Company entered into a debt restructuring agreement with
Affogato Company. A loan for P200,000 due on this date to Affogato Company. The loan
was original issued at 10% effective interest. Interest for current year was paid by ANIMO.
The terms of restructuring are as follows:

a. Reduced the principal obligation to P180,000.

b. Extend the maturity date to December 31, 2023.
c. Reduced the nominal interest rate from 10% to 9.5%.
d. Interest is payable at each year-end starting 2022.
e. On this date, effective interest was at 10.5%.

How much is the carrying value of the loan as of December 31, 2021?

Unit 7 – Leases: Accounting for Lessor

Problem Solving

1. DLSU leased equipment from ANIMO Co. on July 1, 2020 in a finance lease. The present
valu1.e of the lease payments discounted at 10% was P80,000,000. Ten annual lease
payments of P12,000,000 are due each year beginning July 1, 2020. ANIMO Co. had
constructed the equipment recently for P66,000,000, and its retail fair value was
P80,000,000.

What amount did ANIMO Co. record in its income statement for the reporting year ending
December 31, 2020, in connection with the lease ? (ignore taxes.)

2. On January 1, 2020, ANIMO Company leased a commercial space from DLSU Realty
Company under a 5-year operating lease agreement. Previously, ANIMO issued a
commercial space from another location. As an incentive for relocating into DLSU Realty’s
commercial building, DLSU Realty agreed to pay ANIMO moving costs of P100,000 and to
provide 6 months free rent. The new lease contract calls for annual rent payments as
follows:

• P400,000 for the first year, which increases by P40,000 per year, this is payable in advance
every January 1 of each year.
• 10% of sales in excess of P2,000,000 payable every January 31 of the subsequent year.

In addition, the contract states that ANIMO is required to pay a security deposit of P800,000
on January 1, 2020. Benefits expected from using the office space are expected to remain
constant over the lease term.

a. Determine the period rental payment.

b. Determine the total cash received by ANIMO at the inception of the lease contract.
c. Determine the Lease Receivable balance at the end of 2020.

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3. ANIMO Company leased electronic equipment to DLSU Commercials on January 1, 2020.
ANIMO purchased the equipment at a cost of P224,160. The following are the related
information on the lease agreement:

Lease term 4 years

Semi-annual payments P30,000 every January1 and July 1
Economic life of the asset 4 years
Fair value of the asset P224,160
Implicit interest rate 8%

a. Determine the interest income to be reported by ANIMO in 2020.

b. What is the carrying value of the lease receivable on December 31, 2021?

4. ANIMO Leasing acquires machine and leases it to customers under long-term direct finance
lease. ANIMO earns interest under this arrangement at a 6% annual rate. ANIMO leased the
machine it purchased for P1,200,000 under a 5-year contract. The lessee has the option to
buy the machine at the end of the lease term for P200,000, when it is expected to have a
residual value of P320,000.

a. Calculate the amount of the annual lease payments.

b. Instead of a bargain purchase option, a residual value of P200,000 was
guaranteed by the lessee. Calculate the amount of the annual lease payments.