NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL

AC1104 - ACCOUNTING II
Semester 2, 2023/2024

Seminars 6 to 7: Investment Property

A) Pre-seminar preparation

a) Required readings: refer to course outline

b) Be prepared for the discussion questions

B) Self-study

a) Illustration 1

b) NCKL illustrations 1 to 3 (pages 601 to 611)

C) Discussion questions

Q7 HF & Q8 Harvest

AC1104 S6 to S7 - 1
Illustration 1 (BH)

BH Ltd acquired a retail shop on 2 January 2009 for $600,000 with the initial intention of renting
it out. The retail shop is a leasehold property with 20 years remaining on the lease. On 1 July 2009,
BH Ltd rented out the retail shop to an unrelated company for a monthly rental of $8,000, payable
at the end of each month. After 2 years, BH Ltd managed to terminate the lease with the existing
tenant on 30 June 2011. BH Ltd planned to use the retail shop for its own operations from 1 July
2011 onwards.

The market value of BH Ltd’s retail shop was determined to be the following as at:
31 December 2009 : $800,000
31 December 2010 : $700,000
1 July 2011 : $750,000

BH Ltd adopts the fair value model under SFRS(I) 1-40 Investment Property and adopts the cost
model under SFRS(I) 1-16 Property, Plant and Equipment. BH Ltd depreciates all its assets on a
straight-line basis where applicable, and adopts a 31 December year-end.

Required

(i) Provide the journal entries (to the nearest $’000) for recording the events relating to BH
Ltd’s retail shop from 2 January 2009 to 31 December 2011. Show all relevant workings.

(ii) Assume that BH Ltd uses the cost method instead of the fair vale model under SFRS(I) 1-
40 Investment Property, provide the journal entries (to the nearest $’000) for recording the
events relating to BH Ltd’s retail shop from 2 January 2009 to 31 December 2011. How
does the cost method change BH Ltd’s financial statements? Show all relevant workings.

(iii) Under SFRS(I) 1-40 Investment Property, the fair value model requires that all unrealized
gains or losses be recognised in the profit and loss account. What are the pros and cons of
this approach versus recognising the unrealised gains or losses in other comprehensive
income?

AC1104 S6 to S7 - 2
Suggested solution to illustration 1 (BH)

(i) Journal entries for the retail shop using the fair value model:

$’000 $’000
2/1/09 Dr Shop (IP) 600
Cr Cash 600

31/7/09 to Dr Cash 8
30/6/11 Cr Rental income 8

31/12/09 Dr Shop (IP) 200

Cr Fair value gain (P/L) 200

31/12/10 Dr Fair value loss (P/L) 100

Cr Shop (IP) 100

1/7/11 Dr Shop (IP) 50

Cr Fair value gain (P/L) 50

Dr Shop (PPE) 750

Cr Shop (IP) 750

31/12/11 Dr Depreciation expense 21

Cr Accumulated depreciation (PPE) 21

(ii) Journal entries for the retail shop using the cost method:

2/1/09 Dr Shop (IP) 600

Cr Cash 600

31/7/09 to Dr Cash 8
30/6/11 Cr Rental income 8

31/12/09 Dr Depreciation expense 30

Cr Accumulated depreciation (IP) 30

31/12/10 Dr Depreciation expense 30

Cr Accumulated depreciation (IP) 30

30/6/11 Dr Depreciation expense 15

Cr Accumulated depreciation (IP) 15

1/7/11 Dr Shop (PPE) 600

Cr Shop (IP) 600

AC1104 S6 to S7 - 3
 Dr Accumulated depreciation (IP) 75
Cr Accumulated depreciation (PPE) 75

31/12/11 Dr Depreciation expense $15

Cr Accumulated depreciation (PPE) $15

Differences in effects of the 2 methods on BH Ltd’s financial statements:

Fair value model Cost method Difference

Financial year 2009:
Profit & loss – Profit $200,000 ($30,000) $230,000
Balance sheet - NBV $800,000 $570,000 $230,000

Financial year 2010:

Profit & loss – Profit ($100,000) ($30,000) ($70,000)
Balance sheet - NBV $700,000 $540,000 $160,000

Financial year 2011:

Profit & loss – Profit $29,000 ($30,000) $59,000
Balance sheet - NBV $729,000 $510,000 $219,000

(iii) Pros: matching principle?

Cons: volatility in P/L?

AC1104 S6 to S7 - 4
Question 1 (SL)

Streetwall Ltd (SL) acquired a leasehold factory on 1 January 2010 for $2,500,000. The factory,
which has 25 years remaining on the lease, is used to manufacture products that are sold to both
domestic and overseas markets.

During 2011, the demand for SL’s products declined because of intense competition and global
economic slowdown. SL decided to cease its manufacturing activities on 31 December 2011 and
rent out its factory immediately thereafter. SL rented out the factory to an unrelated company for
a monthly rental of $20,000 with effect from 1 January 2012, payable at the end of each month.

The market value of SL’s factory was determined to be the following as at:

31 December 2010 : $3,000,000

31 December 2011 : $2,300,000
31 December 2012 : $2,100,000

SL Ltd depreciates all its assets on a straight-line basis, where applicable, and adopts a 31
December year-end.

Required

(i) Briefly discuss how Streetwall Ltd should account for its factory from the initial
acquisition to the date of change in use of the factory.

(ii) Streetwall Ltd’s management prefers to account for its assets using fair value wherever
possible as it believes that fair value is more relevant for decision making. Revaluation of
any item of property, plant and equipment is to be made in accordance with SFRS(I) 1- 16
para 35(a) where the accumulated depreciation is to be restated proportionately with the
change in the gross carrying amount of the asset so that the carrying amount of the asset
after the revaluation equals its revalued amount.

Provide all the necessary journal entries to record the events relating to Streetwall Ltd’s
factory from 1 January 2010 to 31 December 2012. Show all supporting computations.

(iii) Describe how Streetwall Ltd should faithfully represent the information on investment
property in its financial statements.
Q3 of Sem 2 Exam 2012/2013
Key ans: (ii) Depreciation $225,000, Revaluation Reserve $25,000, Factory (IP) $2,100,000

AC1104 S6 to S7 - 5
Question 2 (PT)

PineTree Ltd (PT) is a Goods and Services Tax (GST) registered company with financial year end
on 31 December.

On 1 July 2012, PT acquired a 30-year leasehold building. PT’s accounting policy is to carry its
leasehold building at fair value. If depreciation is applicable, the straight-line depreciation method
is to be adopted over its estimated useful life.

The purchase consideration for the leasehold building was $6.42 million, inclusive of 7% GST. In
addition, the total stamp duty and other costs incurred that were directly attributable to the
acquisition of the leasehold building amounted to $240,000.

The fair value of the leasehold building was $7.38 million as at 31 December 2012. The general
property market is expected to boom in the next five years.

PT’s draft net income and total equity for 2012 financial year before accounting for the acquisition
of the leasehold building were $1.26 million and $14 million respectively.

Required

(i) Briefly describe the general accounting treatments for Property, Plant and Equipment and
Investment Property with reference to the relevant Singapore Financial Reporting
Standards (International).

(ii) Provide all the necessary journal entries from 1 July 2012 to 31 December 2012 if the
leasehold building is to be accounted for under SFRS(I) 1-16 Property, Plant and
Equipment. The revaluation of the leasehold building is to be done in accordance with
SFRS(I) 1-16:35(b) which requires the accumulated depreciation to be eliminated against
the gross carrying amount of the asset and the net amount restated to the revalued amount
of the asset.

(iii) Provide all the necessary journal entries from 1 July 2012 to 31 December 2012 if the
leasehold building is to be accounted for under SFRS(I) 1-40 Investment Property.

(iv) Compute the return on equity for 2012 financial year if the leasehold building is accounted
for as Property, Plant and Equipment in (ii) above. Show workings.

(v) Compute the return on equity for 2012 financial year if the leasehold building is accounted
for as an investment property in (iii) above. Show workings.

(vi) Advise the director of the company with regard to the use of the leasehold building if the
company wishes to achieve a higher return on equity in the next five years. Justify your
advice.
Q2 of Sem 1 Exam 2013/2014
Key ans: (ii) GST Receivable $0.42m, Revaluation Reserve $1.244m;
(iii) Leasehold Building (IP) $7.38m; (iv)Total Equity $15.14m; (v) Total Equity $15.14m

AC1104 S6 to S7 - 6
Question 3 (LM)

On 1 January 2011, Lonely Mountain Ltd. (LM) purchased a building for $4 billion by cash. The
building was to be used as LM office building upon acquisition. The useful life of the building
was estimated to be 50 years with no salvage value and straight-line depreciation method was to
be adopted for its office building.

On 1 January 2013, Mr. Thorin, CEO of LM decided to revalue the office building to $4.5 billion
in accordance with SFRS(I) 1-16 para 35 (b), where the accumulated depreciation is to be
eliminated against the gross carrying amount of the asset. Meanwhile, Mr. Thorin also revised the
remaining estimated life of the office building to 45 years.

During the financial year 2013, Mr. Thorin learnt that a local real estate developer, Lake Town
Ltd. (LT) was planning to build a shopping centre next to LM’s office building. Mr. Thorin
immediately ceased the use of office building on 1 January 2014 and rented it out on operating
lease to a tenant on 1 March 2014. LM’s accounting policy is to carry its Investment Property (IP)
at fair value (FV). The fair value of the building on the date of change in use was $4.4 billion.

On 1 August 2014, based on LM’s 2014 second quarter financial results on 30 June 2014, Mr.
Thorin estimated the profit for the financial year 2014 would be $0.35 billion above the analysts’
estimate. Mr. Thorin’s six-month bonus is tied to meeting the analysts’ estimated net income.

On 1 September 2014, LT announced that they had forsaken the plan of developing the shopping
centre. Mr. Thorin estimated that the fair value of the building would decline to $4 billion after
LT’s announcement was made. Shortly after LT’s announcement, Mr. Thranduil, CEO of
Mirkwood Real Estates Ltd. approached Mr. Thorin and offered to purchase the building for $3.4
billion.

LM has a 31 December financial year end.

Required

(i) Prepare all the necessary journal entries to record the transactions relating to the building
for the financial years from 2011 to 2013.

(ii) Prepare all the necessary journal entries to account for the change in use of the building.

(iii) Briefly explain Mr. Thorin’s motive to cease the use of office building immediately after
knowing Lake Town Ltd.’s plan of constructing a shopping centre next to its office building,
and to subsequently rent the building out on an operating lease.

(iv) Prepare all the necessary journal entries for the following situations, if:
(a) the sale of building to Mirkwood Real Estates Ltd. was to be made; and
(b) the sale of building to Mirkwood Real Estates Ltd. was not made.

AC1104 S6 to S7 - 7
(v) Discuss if the sale of building would help Lonely Mountain Ltd. to smooth its earnings for
the financial year 2014 and yet has no impact on Mr. Thorin’s bonus. Limit your answer
to a maximum of three sentences.
Q4 of Sem 2 Exam 2014/2015
Key ans: (iv) with sale: loss on disposal $1b; without sale: FV loss = $0.4b

Question 4 (Noble)

Noble Pte Ltd (Noble) is a well-known jewellery seller in Singapore. Noble sells only those unique
and luxury jewelleries from Africa which include gold, silver and diamond, etc.

Noble acquired an asset on 1 July 2016. At its balance sheet date on 31 December 2016, the fair
value of the asset was above the acquisition cost. The asset was then sold for cash on 30 June 2017
and a gain was recognised. The asset is not subject to depreciation.

The asset concerned above could be an asset under the Singapore Financial Reporting Standards
(International) listed below:

(a) SFRS(I) 1-2 Inventory;

(b) SFRS(I) 1-16 Property, Plant and Equipment; or
(c) SFRS(I) 1-40 Investment Property.

Required

(i) Provide one example of the type of asset, listed in (a) to (c) above, that Noble Pte Ltd may
have acquired on 1 July 2016 in accordance with Singapore Financial Reporting Standards
(International).

(ii) Briefly state, in one sentence, how SFRS(I) 1-8 Accounting Policies, Changes in
Accounting Estimates and Errors defines “accounting policy”.

(iii) For the examples provided by you in requirement (i) above, suggest one significant
accounting policy for each item and briefly explain the accounting treatments of any gains
for each of these in accordance with their relevant Singapore Financial Reporting Standards
(International) in (a) to (c) above.

(iv) Assume that Noble Pte Ltd acquired the asset for $80,000 on 1 July 2016. At its balance
sheet date on 31 December 2016, the fair value of the asset was $90,000. The asset was
then sold for $100,000 cash on 30 June 2017 and a gain was recognised. For the three
examples provided by you in requirement (i) and their significant accounting policies in
requirement (iii), provide all the necessary journal entries on 31 December 2016 and 30
June 2017 for each asset listed in (a) to (c) separately.
Adapted from Q1 of AC1102 Sem 1 Exam 2017/2018
Key ans: (iv) (a) Revenue $100,000, (b) Cost model – Gain on disposal $20,000,
(c) Fair value model – Gain on disposal $10,000

AC1104 S6 to S7 - 8
Question 5 (HG)

Hiro Global Pte Ltd (HG) has a 31 December financial year end. HG carries all its non-current
assets using the cost model, except for those that are classified as investment property.

On 1 January 2016, HG bought a boutique hotel for $4 million and entered into a management
contract with Zest Inns Ltd (ZI) to run the hotel under the latter’s branding, operations and
management. Under the contract, HG retained insignificant exposure to variation in the cash flows
generated by the operations of the hotel. The estimated useful life of the hotel was 50 years with
no salvage value.

On 30 June 2018, HG terminated the contract with ZI and started operating the hotel on its own
including running the on-site café, laundry service, room service, banquet room and pub from the
next day.

The fair values of the hotel are as follows:

31 December 2016 $3.5 million

31 December 2017 $3.8 million
30 June 2018 $4.75 million
31 December 2018 $4.6 million

Required

Prepare all the necessary journal entries pertaining to the hotel for the financial years 2017 and
2018.
Q1 Part I of AC1102 Sem 1 Exam 2019/2020
Key ans: Fair Value Gain on Hotel (IP) $$1.25m

Question 6 (MR)

Mango Resorts Ltd. (MR) is a Singaporean hospitality company that manages and operates resorts
to provide lodging, food, and drink services. MR has a financial year end on 31 December.

MR hired a real estate developer to self-construct three units of one-bedroom villa at a total
construction cost of $0.63 million per unit for MR’s lodging business. The construction was
completed on 1 December 2019. Similar one-bedroom villas could have been purchased at $0.6
million per unit on the same date. On 31 December 2019, MR purchased another 12 units of three-
bedroom villa at $1.2 million per unit. All the 15 villas were available for use for MR’s lodging
business from 1 January 2020 onwards.

To attenuate the impact of COVID-19 on the business, MR signed a 2-year management contract
with Orange Hotel (OH) to operate and manage all the 15 units of villa with effect from 1 April
2021. Under the contract, the operating profit of the villas belongs to OH and MR receives a fixed
amount of $0.5 million rental income from OH at the end of each quarter.

AC1104 S6 to S7 - 9
According to MR’s accounting policy, all properties are accounted for at fair value. MR adopts
SFRS(I) 1-16 Property, Plant and Equipment (PPE) paragraph 35(b), where accumulated
depreciation was eliminated upon revaluation. MR has the policy to revalue its PPE at every
financial year end. The useful life of each villa was estimated to be 50 years with no salvage value,
and the straight-line depreciation method was adopted.

The fair values of the villas were as follows:

One-bedroom villa Three-bedroom villa
(per unit) (per unit)
31 December 2019 $600,000 $1,200,000
31 December 2020 $686,000 $1,470,000
1 April 2021 $670,000 $1,250,000
31 December 2021 $700,000 $1,500,000

Required

(i) With reference to the relevant Singapore Financial Reporting Standards (International),
briefly
(a) describe how to determine the initial cost of the three units of the one-bedroom villa
on 1 December 2019; and
(b) explain when MR should start to depreciate the three units of one-bedroom villa.

(ii) Prepare all the necessary journal entries (with dates) to account for the events relating to
the 15 villas for the financial year 2021 under the following two independent scenarios:
(a) if MR signed the management contract with OH; and
(b) if MR did not sign the management contract with OH but self-operated the villas
throughout the financial year.

(iii) Before considering the events recorded in requirement (ii)(a), MR’s draft net income, total
equity, total asset, and net sales for the financial year 2021 were $0.4 million, $50 million,
$136.5 million, and $10 million, respectively. Compute MR’s revised net income, total
equity, and total assets for the financial year 2021 after considering the events recorded in
requirement (ii)(a). Show your calculations

(iv) Assume that MR self-operated the 15 villas throughout the financial year 2021. Before
considering the events recorded in requirement (ii)(b), MR’s draft net income, total equity,
total asset, and net sales for the financial year 2021 were $0.45 million, $45 million, $130
million, and $14 million, respectively. Compute MR’s revised net income, total equity, and
total assets for the financial year 2021 after considering the events recorded in requirement
(ii)(b). Show your calculations.

AC1104 S6 to S7 - 10
(v) Based on your answers in requirements (iii) and (iv) above, use Return on Equity (ROE)
DuPont analysis to analyse and comment on the effect of MR running the 15 villas under
the management contract with OH versus self-operating the 15 villas for the financial year
2021. Ignore any tax effect in your work and use year-end balances in place of average
balances where applicable. Show your calculations (round your answers to three decimal
places throughout your computations, e.g., 1.333).
Q1 of AC1104 Sem 1 Exam 2021/2022
Key ans: (i) $1.8m; (ii)(a) DR RR $2.5875m, (b) CR RR $0.804m;
(iii) NI $4.8895m; (v) NI $0.048m; (v) ROE 0.094 vs 0.001

Question 7 (HF)

Hedge Fun Ltd. (HF) is a Singaporean company manufacturing construction and building materials
such as welded wiremesh, reinforcement bar, mild steel angle bar, etc. HF acquired a warehouse
(with a total area of 10,000 square feet) by cash on 1 January 2021 to store its finished goods. The
acquisition cost of the warehouse is $2,400,000. HF depreciates the warehouse using the straight-
line depreciation method with no residual value over its estimated useful life of 80 years. The
warehouse space could be leased out separately under a finance lease. The market value of each
square foot is the same.
Due to a decrease in the demand for building materials in May 2021, HF reduced its production
volume and decided to rent out a portion of the warehouse. As a result, HF ceased the use of 4,000
square feet of the warehouse on 1 July 2021 and successfully rented it out on a one-year operating
lease to a tenant on 1 October 2021 for $12,000 per month. The rental income is receivable on the
last day of each month.
A year later, the recovery of property market increased the demand for construction and building
materials. In turn, HF restored its production volume. On 30 September 2022, HF didn’t renew the
lease with its existing tenant and immediately occupied the entire warehouse for its own storage
purposes.
HF’s accounting policy is to carry its Property, Plant and Equipment (PPE) at cost and its
Investment Property (IP) at fair value. HF has its financial year end on 31 December.
The fair values of the entire warehouse are as follows:
1 January 2021 $2.4 million
1 July 2021 $2.3 million
1 October 2021 $2.1 million
31 December 2021 $2 million
30 September 2022 $2.3475 million
31 December 2022 $2.5 million

AC1104 S6 to S7 - 11
Required

(i) Prepare all the necessary journal entries (with dates) to account for the events related to the
warehouse for the financial years 2021 and 2022. Ignore journal entries for rental income.

(ii) If the warehouse cannot be sold or leased out on a finance lease separately, how should HF
classify the warehouse for the financial year 2021? Support your explanation with
reference to the relevant Singapore Financial Reporting Standards (International). Limit
your answer to a maximum of three sentences.

(iii) Assume the warehouse cannot be sold or leased out on a finance lease separately and HF
had not rented out the 4,000 square feet of the warehouse but let it lie idle during the
financial year 2021. Explain if HF could report a higher or lower net income for the
financial year 2021 as compared to the 2021 net income in requirement (i) above? Support
your explanation with calculations.
Q1 of AC1104 Sem 2 Exam 2022/2023
Key ans: (i) 2021 Dr FV Loss on IP $0.12m, 2022 Cr FV gain on IP $0.139m; (ii) PPE;
(iii) Yes

Question 8 (Harvest)

Harvest Pte Ltd (Harvest), with a financial year-end on 30 September, acquired a 20-year leasehold
building for $6,000,000 on 3 January 2021 and used it as a warehouse to store its inventories. The
leasehold building has an estimated residual value of $1,000,000. Harvest applies straight-line
depreciation method to all depreciable assets.

Towards the end of year 2022, Harvest changed its business model and transited from a
merchandiser to a service provider. The leasehold building was no longer required and left idle
from 31 December 2022 due to minimal inventory holding. Since then, the leasehold building was
available for rent and was subsequently leased to Magnolia Ltd for a year commencing on 1
February 2023.

The following information pertains to the leasehold building.

Dates Fair values
31 December 2021 $5,997,000
31 December 2022 $5,140,000
1 February 2023 $5,340,000
30 September 2023 $5,678,000

Below shows the accounting policies of the leasehold building in two scenarios.
Scenario Property, Plant & Equipment (PPE) Investment Property (IP)
A Cost model Fair value model
B Revaluation model Fair value model

AC1104 S6 to S7 - 12
Required

(i) Based on the accounting policies stated in Scenario A above, prepare all necessary journal
entries to account for the leasehold building for the financial year ended 30 September 2023.

(ii) Under scenario B, assume that the leasehold building was only revalued once on 31
December 2021 while it was being used as a warehouse, with any accumulated depreciation
being eliminated upon revaluation.

Based on the accounting policies stated in Scenario B above, prepare all necessary journal
entries to account for the leasehold building for the financial year ended 30 September 2023.

(iii) The senior management can receive a special bonus only when the net profit for the financial
year and total equity at the financial year end are at least $500,000 and $7,500,000,
respectively.

Assume that Harvest is currently applying Scenario A, under which, the net profit for the
financial year ended 30 September 2023 was $495,000 and total equity on 30 September
2023 was $7,400,000.

With reference to your answers in requirement (i) & (ii), briefly discuss whether the senior
management would be entitled to the special bonus for the financial year ended 30 September
2023 if Harvest had applied Scenario B instead of Scenario A. Show all supporting
computations clearly.
Q1 of AC1104 Sem 1 Exam 2023/2024
Key ans: (i) DR Loss on revaluation $360,000; (ii) DR Loss on revaluation $347,000
(iii) Net profit under Scenario B = $504,750

-END-

AC1104 S6 to S7 - 13