Question

Question 2

Mark Limited is an investment company that purchases buildings and holds them for a, number
of purposes, such as resale, leasing and its own use.
On 1 January 2019, Mark Limited purchased an old building, Mark Towers, for N$300 000.
Conveyancer’s fees amounted to N$20 000
• This building is situated in an isolated part of Durban (South Africa) and there is no
development anywhere nearby. At the time of purchase, there had been no property
transactions in this area for many years and the possibility of leasing the building to tenants
was remote.
• During November 2019, development began of a new industrial park in the area. As a
result, the building was able to be leased to tenants involved in the development of the
industrial park. Due to the influx of people of people into the area, the directors decided to
paint one side of the buildings with the corporate logo of Mark Limited.
• This building has never had an air-conditioning system. After numerous complaints from
tenants about not being able to tolerate the Durban heat, Mark Limited decided to upgrade
the building by installing a ducted air-conditioning system on 1 December 2019.
The cost of installation included the following:
- Adjustments to the structure of the building 30 000
- Painting 50 000
- Air-conditioning system 200 000
- Installation costs 50 000
The ducted air-conditioning system has a 10 year life and a nil residual value
• As a result of the new industrial park, there was suddenly a demand for properties in the
area. As a result, the fair value of Mark Towers was able to be determined on 31 December
2019 at N$420 000. Mark Limited would like to measure this investment property at fair
value now that fair values have become available.
• The building has a 10 year useful life and an estimated residual value of N$50 000
Mark Limited also holds other investment property, which is measured under the fair value model.
The fair value of this other investment property is as follows:
• 1 January 2019 N$ 1 000 000
• 31 December 2019 N$ 1 250 000

Answer 1

As per IAS-40" Investment property"- An property is to be treated as Investment property if it is acquired for the purpose of earning rental income or for capital appreciation.

-In the given case , the main purpose of acquiring the property is to give it on lease and to earn rental lease income. Hence such property should be treated as Investment property from the begin.

On 1 January 2019, Mark Limited purchased an old building, Mark Towers, for N$300 000.Conveyancer’s fees (Legal fees) amounted to N$20 000. Legal cost being directly assiciated to purchase of the assets , should be capitalised.

Hence Journal entry on 1 january 2019-

Date	Particulars	Debit($)	Credit($)
1st january 2019	Investment property1 Dr	320000
	To Bank		320000
	(Being building purchased for Investment purpose for $300000 and Conveyancers fee paid $20000)

All the expenditure on 1 st December 2019 will increase and enhance the future economic benefit of the property , and hence hould be capitalised wilth the Investment proprerty. Journal entry will be-

Date	Particulars	Debit($)	Credit($)
1st December 2019	Investment Property1 Dr	330000
	To Bank		330000
	(Being cost of development in Investment property capitalised-Adjustment cot-$30000, Painting -$50000,AC system -$200000, Installation cost-$50000)

-As per IAS -40 " Investment property"

1.If the investment property is measured under Fairvalue method, then the resulting gain / loss due to change in Fair value to be transferred to the Profit & Loss statement.

2.Propert valued under Fairvalue model will not be depreciated.

In the given case carrying amount of The investment property as on 31 December 2019 = $650000

Its Fair value = $420000.

Hence Los due to change in Fair value = $650000-$420000 = $230000

Date	Particulars	Debit($)	Credit($)
31 Dec 2019	Fair Value Change Loss(P/L) Dr.	230000
	To Investment property 1		230000
	(Being fair vaue loss recorded)

For the other Investment property Gain due to Fair value change = $1250000-$1000000 = $250000

journal entry will be-

Date	Particulars	Debit($)	Credit($)
31 Dec2019	Investment Propery 2 Dr	250000
	To Gain on Fair Value Change		250000
	(Being gain due to FV incease , recorded)