Question

1. Assume that there are three separate real estate companies: U.S. Realty (which applies the cost model), U.K. Realty (which applies the revaluation model), and International Realty (which applies the fair value model). Assume also that on December 31, 2003, each company pays £1,000 cash to obtain investment property comprising land with negligible value and an office building worth £1,000. The building has a 10-year useful life, has no residual value, and is expected to provide a constant stream of economic benefits over time.

What is the accounting entry for each company for the following four scenarios:

1. on December 31, 2003, at acquisition?
2. on December 31, 2004, assuming the investment property fair value is £1,300?
3. on December 31, 2005, assuming the investment property fair value is £1,100?
4. on December 31, 2006, assuming the investment property fair value is £500?

Answer 1

SOLUTION:

U.S. Realty
Date	Particulars	Debit	Credit
31-Dec-03	Investment Property	1,000
	Cash		1,000
31-Dec-04	Depreciation expense - Investment Property	100
	Accumulated Depreciation - Investment Property		100
31-Dec-05	Depreciation expense - Investment Property	100
	Accumulated Depreciation - Investment Property		100
31-Dec-06	Depreciation expense - Investment Property	100
	Loss on impairment	200
	Accumulated Depreciation - Investment Property		100
	Accumulated Impairment loss - Investment Property		200
UK Realty
Date	Particulars	Debit	Credit
31-Dec-03	Investment Property	1,000
	Cash		1,000
31-Dec-04	Investment Property	300
	Revaluation Surplus - Investment Property		300
31-Dec-05	Revaluation Surplus - Investment Property	200
	Investment Property		200
31-Dec-06	Revaluation Surplus - Investment Property	100
	Loss on Revaluation - Investment Property	500
	Investment Property		600
International Realty
Date	Particulars	Debit	Credit
31-Dec-03	Investment Property	1,000
	Cash		1,000
31-Dec-04	Investment Property	300
	Gains in fair value - Investment Property		300
31-Dec-05	Loss in fair value - Investment Property	200
	Investment Property		200
31-Dec-06	Loss in fair value - Investment Property	600
	Investment Property		600