Unit i - Audit of Investment Property_final_t31314

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. Cons Consid ider erin ing g the the natu nature re, , init initia ial l reco recogn gnit itio ion n and and subs subseq eque uent nt meas measur urem emen ent t 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t *Property,plantandequipmenttermsareassumed ermsareassumedtobeinvestm tobeinvestmentproperty ent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unde landheldforacurrentlyundetermined terminedfutureuse.(Ifanen futureuse.(Ifanentityhasnotdetermi tityhasnotdetermined ned that itwillusethe landas landas owner-occ owner-occupi upiedprope edpropertyor rtyor forshort-term forshort-term salein 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. prope property rty that that is being being constr construc ucted ted or devel develop oped ed for futur future e use as inves investme tment nt 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. prope property rty held held for future future devel develop opmen ment t and and subseq subseque uent nt use as ownerowner-oc occup cupie ied d property, 10. prope property rty held held for future future devel developm opmen ent t and and subse subseque quent nt use to be occup occupie ied d by employees 11. propertythatisleasedtoanotherentityunderafinancelease.

Audi ting Practice I I Wor kbook

Thi rd Term, AY 2013-201 2013-2014 4 Page 1-1

Problem1-2:InvestmentProperty ABCCo.hasthefollowingassets:

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

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:

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DEF ’semployeeswhopayrentatmarket rates Office building awaiting disposal

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 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.

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.


Thi rd Term, AY 2013-2014 Page 1-2

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 Company’s December 31, 2014 statement of financial position amounted to P21,504,300. Supporting schedule of the Company presentsthefollowingcomposition:

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

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

Afteryouraudit,what amountshould be presented as partof investment propertyand owneroccupiedpropertyinABCCompany’s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 Audi ting Practice I I Wor kbook

P

3,500,000 4,350,000 6,700,000 5,200,000 1,120,000 590,000 710,000 345,000 3,890,100


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

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

Required: 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broker’s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.



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client ’s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

P2, 600,000 8 years

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? 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Company’snetincome for the period ended December 31, 2014 under (a) fair value model and (b) cost model. Audi ting Practice I I Wor kbook


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Company’s 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:



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:

Land 1 Land 2 Bldg 1 Bldg 2

P4,820,000 5,222,000 3,920,000 8,965,000

P180,000 130,000 80,000 150,000

P4,820,000 5,352,000 4,720,000 9,115,000

3,200,000 4,852,000 2,800,000 8,900,000

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

Land 3 Land 4 Bldg 3 Bldg 4

1,300,000 2,300,000 4,000,000 2,800,000

(100,000) (700,000) 780,000 (100,000)

1,300,000 1,600,000 4,000,000 2,700,000

500,000 200,000 (200,000) 300,000

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?



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Group’s 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rubb ershoestoDLSU’s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. Audi ting Practice I I Wor kbook


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

P 4,000,000 9,000,000 2,000,000 4,400,000 3,600,000

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.



TheCompany’s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

P 1,182,609 2,660,870 591,304 1,300,870 1,064,347

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

 3,000,000 1,200,000

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:



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?



Unit i - Audit of Investment Property_final_t31314

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