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Investment Property & Other Investments

1. Paramount purchases a land property at a cost of P100,000,000. In the sale and


purchase agreement, P20,000,000 of the purchase price is attributed to the land
portion. The building consists of 10 floors of equal space. Paramount also incurs the
following cost to market for tenants, P500,000 and administrative expenses, P200,000.

Question 1: Assuming Paramount Company uses two floors or 20% of the entire building
for administrative purposes, at what amount should the investment property be initially
recognized?
a. P82,400,000
b. P82,800,000
c. P83,200,000
d. P103,000,000

Question 2: Assuming Paramount Company, uses one-half of the ground floor or 5% of


the entire building for administrative purposes and the rest of the floor area are let out
to tenants, at which amount should the investment property be initially recognized?
a. P82,400,000
b. P82,800,000
c. P97,850,000
d. P103,000,000

2. On January 1, 2018, Dayag Company owns a newly built hotel property in Manila. The
hotel is leased out to Lee Holiday Inn under a 40-year operating lease. In the lease
agreement, Dayag Corporation will receive yearly lease payment of P25,000,000 for 40
years plus 5% of room revenue from the operations of the hotel. At the inception of the
lease the cost of the hotel is P120,000,000 the estimated useful life is 40 years. The
company uses the cost model for all its property, plant and equipment and investment
properties.

Question 1: If the stream of cash flows is more of rental cash flows rather than room
revenue cash flows, what is the carrying value of the investment property as of
December 31, 2018?
a. None
b. P95,000,000
c. P117,000,000
d. P120,000

Question 2: If the stream of cash flows is more of room revenue rather than rental cash
flows, what is the carrying value of the investment property as of December 31, 2018?
a. None
b. P95,000,000
c. P117,000,000
d. P120,000,000

3. Mortal Company leases an entire shopping complex from Journal Company under a 20-
year operating lease. Under the lease agreement, Mortal would manage and take the
risks of operating the shopping complex for 20 years. It pays a yearly rental of
P40,000,000 to Journal Company. Mortal Company uses 200% of the floor area for its
own operations. The rest of the floor area is sub-leased to other tenants. Mortal
Company expects rental income from the sublease to be about P35,000,000 per year for
20 years. The borrowing costs of Mortal Company is 8% per year. The cost of
constructing the complex incurred by Journal Company is P480,000,000, transaction and
other incidental costs amount to P20,000,000. If Mortal Company elects to treat its
interest in the investment property be initially recognized by Mortal Company?
a. None
b. P343,640,000
c. P400,000,000
d. P500,000,000
4. On January 1, 2016, Trunk Company uses the cost model for all investment properties,
acquired an investment property at cost of P4,000,000. The estimated useful life of the
property is 40 years, however, based on current market trend for similar property that is
used for rental, its economic life is 30 years. The estimated salvage values based on its
life is P100,000, while based on its economic life is, P400,000. The estimated
recoverable value of the property on December 31, 2018 is P3,700,000. At what amount
should the investment property be reported on December 31, 2018 statement of
financial position?
a. P3,640,000
b. P3,700,000
c. P3,707,500
d. P3,760,000
5. On July 1, 2018, Strata Company purchases an investment property at a cost of
P50,000,000 including transaction costs. On October 1, 2018 the fair value of the
property increases to P51,000,000. At December 31, 2018 the fair value of the property
is P48,000,000. The rental income received per quarter is P1,500,000. The property has
a useful life of 50 years.

Question 1: If the company uses the cost model, what is the net effect on the profit or
loss for the six months ended December 31, 2018 in relation to the investment
property?
a. (P500,000)
b. P1,000,000
c. P1,500,000
d. P2,000,000