Question

Victoria Property Group owns three properties, the financial Accountant, Angel is in the process of finalizing the financial statements for the year ended 31 August 2015. She has been recently appointed because the previous financial accountant resigned. You have requested all the information regarding the properties. Due to her busy schedule she has scrawled some details on a piece of paper: PPE=Cost model Investment Prop=FV model No impairment indicators found when assessed during the year. IF assets to be depreciated use straight-line. Rodeo Drive: Bought 1 Sept 2014 @ N$7,500,000. A portion was allocated to value of the land, calculated at N$825,000. Used as our warehouse. At year end, other similar warehouses in the area @ the same size were being sold for N$9,240,000. Estimated useful life=40 years Residual value=nil Jimmy Walk: Purchased 1 March 2013 to rent out. Cost N$11 220k. Was disclosed @FV of N$ 16 830k in last year's AFS. This year, Victoria upgraded the property (more parking plus extra rentable rooms) at a cost of N$10 230k, resulting in a new municipal valuation at year end of estimated N$31 020k (good indication of FV) and also resulted in increased rent. Estimated Useful life=20 years Residual value=nil Fifth Avenue: This was purchased 8 months ago, at a cost of N$ 13 860k with the intention of capital appreciation. Very specialized property though and seems impossible to measure FV. Currently rented out to animal lobbyist group. Estimated useful life=40 years Residual value N$200,000.00 Required: Describe, giving reasons, how Victoria Property Group should account for these properties in the financial statements for the year ending 31 August 2015.

Answer 1

These Three properties first needs to be grouped in their respective heads as per their nature & to be accounted for in the financial statements as follows:-

a. Rodeso Drive:- It is to be treated as land & building to be shown under the head property plant & equipment under Tangible Asset. To be recognized as per cost model in the financial statements after applying for depreciation to be calculated as per SLM:-

Cost of Rodeso drive = N$ 75,00,000, Now to calculate depreciation only on the building part of the property and not on the land part of Rodeso drive.

Depreciation = N$75,00,000-N$825000(cost of land)/40 years

= N$ 166875

Amount to be accounted for in the financial statement for Rodeso Drive = N$(75,00,000-166875)= N$ 73,33125

b. Jimmy Walk:- It is to be treated as Investment Property because the investment property is a property held by the owner to earn rental income. Here jimmy walk had been purchased to earn rental income and assuming the following two conditions are being satisfied:-

i). It is probable that future economic benefits associated with the item will flow to the entity

ii) The cost of the item can be measured easily.

Here the company is using a fair value model for investment property therefore as per the fair value model Jimmy walk is to be recognised in the financial statements as on 31-Aug-2015 at the fair value of N$ 31020K.

No depreciation is to be calculated where the investment property is being recognized at fair value from time to time.

Any gain or loss arising from remeasuring of investment property at fair value would be recognized in profit or loss account.

c. Fifth Avenue:-

It is to be treated as Investment Property because the investment property is a property held by the owner to earn rental income or for capital appreciation. Here Fifth Avenue had been purchased for capital appreciation and assuming the following two conditions are being satisfied:-

i). It is probable that future economic benefits associated with the item will flow to the entity

ii) The cost of the item can be measured easily.

Here it is impossible to determine the fair value so we have to use cost value model to recognise this specialised property being used for capital appreciation.

Amount to be recognised would be = Cost of Fifth Avenue - Depreciation

Depreciation for 8 months as per SLM= 13860-200/40*8/12= N$ 228

= N$(13860-228)= N$ 13632