PROBLEMS

INVESTMENT PROPERTY
CASH SURRENDER VALUE

ACFAR 2233 INTERMEDIATE ACCOUNTING 2

LEOPOLDO D. MEDINA, CPA, MSA

ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 1

ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 2
PROBLEM 1
CD Company and its subsidiaries own the following properties that are accounted
for in accordance with international accounting standards:
■ Land held by the parent for undetermined use 5,000,000
■ A vacant building owned by the parent and to be leased out 3,000,000
under an operating lease
■ Property held by a subsidiary, a real estate firm, in the 2,000,000
ordinary course of business
■ Property held by the parent for use in production 4,000,000
■ Building owned by a subsidiary and for which the 1,500,000
subsidiary provides security and maintenance services
to the lessees
■ Land leased by the parent to a subsidiary under an 2,500,000
operating lease

ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 3

■ Property under construction for use as investment property
6,000,000
■ Land held for future factory site
3,500,000
■ Machinery leased out by the parent to an unrelated party
1,000,000
under an operating lease

Required:
1. Compute the total investment property that should be reported
in the consolidated statement of financial position of CD
Company and its subsidiaries.
2. IndicateACFAR
the2233classification of MSA
LEOPOLDO D. MEDINA, CPA, the assets that are excluded from
4
(1) Land held by the parent for undetermined use 5,000,000
A vacant building owned by the parent and to be leased out
under an operating lease 3,000,000
Building owned by a subsidiary and for which the
subsidiary provides security and maintenance services
to the lessees 1,500,000
Property under construction for use as investment property 6,000,000
Total investment property 15,500,000

(2)
Property held by a subsidiary, a real estate firm, in the Inventory
ordinary course of business
Property held by the parent for use in production PPE
Land leased by the parent to a subsidiary under an * PPE
operating lease
Land held for future factory site PPE
Machinery leased out by the parent to an unrelated party PPE
under an operating lease

*This item is under PPE in the consolidated FS; however, this is Investment Property
under the FS of the parent company only.

ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 5

PROBLEM 2
Grandeur Company ventured into construction of a condominium in BGC
which is rated as the largest state-of-the-art structure.
The board of directors decided that instead of selling the condominium,
the entity would hold this property for purposes of earning rentals by
letting out space to business executives in the area.
The construction of the condominium was completed, and the property
was placed in service on January 1, 2020. The cost of the construction
was P50,000,000. The useful life of the condominium is 25 years and the
residual value is P5,000,000.
An independent valuation expert provided the following fair value at
each subsequent year-end:
December 31, 2020 55,000,000
December 31, 2021 53,000,000
December 31, 2022
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
60,000,000 6
Required:
1. Prepare journal entries for 2020, 2021 and 2022:
2. The investment property is accounted for under the cost
model.
3. The investment property is accounted for under the fair
value model.

ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 7

(1) COST MODEL
2020 Investment Property 50,000,000
Cash 50,000,000

Depreciation 1,800,000 50M - 5M

Accumulated depreciation 1,800,000 25 yrs

2021 Depreciation 1,800,000

Accumulated depreciation 1,800,000

2022 Depreciation 1,800,000

Accumulated depreciation 1,800,000

Investment property 50,000,000

less: Accumulated depreciation 5,400,000
Carrying amount as of 12.31.22 44,600,000
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 8
(2) FAIR VALUE MODEL
2020 Investment Property 50,000,000
Cash 50,000,000

Investment Property 5,000,000 50M vs 55M

Gain from change in fair value 5,000,000

2021 Loss from change in fair value 2,000,000 55M vs 53M

Investment Property 2,000,000

2022 Investment Property 7,000,000 53M vs 60M

Gain from change in fair value 7,000,000

Investment Property
50,000,000
5,000,000
2,000,000
7,000,000

60,000,000

ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 9

PROBLEM 3
On January 1, 2020, WX Company acquired property consisting of ten identical
freehold detached houses each with separate legal title including the land on which it
is built for P200 million, 20% of which is attributable to the land. The units have a
useful life of 50 years.
The following costs are also incurred on such date:
■ Nonrefundable transfer taxes not included in the purchase price 20,000,000
■ Legal cost directly attributable to the acquisition 1,000,000
■ Reimbursement to the previous owner for repaying nonrefundable
property taxes for the six-month period ending June 30, 2020
100,000
■ Advertising campaign 500,000
■ Opening function to celebrate new rental business 200,000
■ On June 30, 2020, the entity paid local property taxes of P200,000 for the year
ending June 30, 2021.
■ Throughout 2020,
ACFAR the entity
2233 LEOPOLDO paidCPA,
D. MEDINA, incurred
MSA repairs and maintenance of P120,000.
10
The entity used one of the ten units to accommodate the administration and
maintenance staff.
The other nine units are rented out to independent parties under an operating
lease.
On December 31, 2020, the fair value of each unit was reliably estimated at P25
million. The fair value of the units can be measured reliably. The accounting
policy is to use the fair value model for investment property.
Required :
1. What is the initial measurement of the investment property?
2. What is the initial measurement of the land to be accounted for as property,
plant and equipment?
3. What is the initial measurement of the building to be accounted for as
property, plant and equipment?
4. What is the gain from the increase in fair value of investment property for the
current year?
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 11
(1) Acquisition cost or purchase price 200,000,000
Nonrefundable transfer taxes not included
in the purchase price 20,000,000
Legal cost directly attributable to the
acquisition 1,000,000
Total capitalizable costs 221,000,000
x 9/10 *
Initial measurement of Inv Property 198,900,000

* 9 out of 10 units to be rented out to

independent parties under operating lease

(2) 221,000,000
x 1/10 1 of the 10 units to accommodate
22,100,000 the admin and maintenance staff

22,100,000 x 20% 4,420,000 Land

(3) 22,100,000 x 80% 17,680,000 Building

ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 12
(4) Investment Property
CA FV
25M x 9 units
198,900,000 225,000,000
increased by 26.1M Gain from increase in FV of Inv Prop

(5) Depreciation of Buiding

17,680,000
divide by 50
yrs
353,600

ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 13

PROBLEM 4
QR Company, a real estate entity, had a building with a carrying
amount of P20 million on December 31, 2020. The building was
used as offices of the entity’s administrative staff.
■ On December 31, 2020, the entity intended to rent out the
building to independent third parties. The staff will be moved to
a new building purchased early in 2020. On this date, the
original building had a fair value of P35 million.
■ Also, on this date, the entity also had land that was held for sale
in the ordinary course of business. The land had a carrying
amount of P10 million and fair value of P15 million on December
31, 2020. On such date, the entity decided to hold the land for
capital appreciation.
■ The accounting policy is to carry all investment property at fair
value. ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 14
Required :
1. On December 31, 2020, what amount should be recognized in
revaluation surplus as a result of transfer of the building to
investment property?
2. On December 31, 2020, what amount should be recognized in
profit or loss as a result of transfer of the land to investment
property?

ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 15

(1) Building
from PPE to Investment Property

FV 35,000,000
less CA 20,000,000
Revaluation surplus 15,000,000

(2) Land held for sale in the ordinary course of business

from Inventory to Investment Property

FV 15,000,000
less CA 10,000,000
Gain on reclassification to
investment property 5,000,000

ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 16

For exercises/drills in Investment
Property, please solve Problems
22-3 to 22-8 in your textbook.
Guide answers
3.a 4.b 5.a 6.b 7.a. 8.d

ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 17

PART II

CASH SURRENDER VALUE

*Note : Cash Surrender Value (CSV) is not

part of Investment Property; it is considered
Other Noncurrent Investment

ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 18

PROBLEM 1
GF Company insured the life of the president for P2,000,000, the
entity being the beneficiary of an ordinary life policy. The annual
premium is P60,000.
The policy was dated January 1, 2020 and carried the following
cash surrender value P60,000, P84,000 and P116,000 at the end of
policy years 2022, 2023, 2024, respectively.
The entity followed the calendar year as the accounting period. The
president died on June 30, 2024 and the policy was collected on
July 31, 2024.

Required: Prepare journal entries from January 1, 2020 to July 31,

2024.
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 19
1.1.20 Life insurance expense 60,000
Cash 60,000

1.1.21 Life insurance expens 60,000

Cash 60,000

1.1.22 Life insurance expense 60,000

Cash 60,000

12.31.22 Cash surrender value 60,000

Life insurance expense 20,000 60T x 1/3
Retained earnings 40,000 60T x 2/3

1.1.23 Life insurance expense 60,000

Cash 60,000

12.31.23 Cash surrender value 24,000 84T - 60T

Life insurance expense 24,000

1.1.24 Life insurance expense 60,000

Cash 60,000

ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 20

6.30.24 Cash surrender value 16,000 116T-84T=32T
Life insurance
expense 16,000 32T x 6/12

Cash surrender value

60,000
24,000
16,000
100,000

7.31.24 Cash 2,000,000

Cash surrender value 100,000
Life insurance
expense 30,000 unexpired
Gain on life insurance settlement 1,870,000 portion
60T x 6/12

ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 21

PROBLEM 2
IJ Company took out a P5,000,000 insurance policy on the life of
the president on January 1, 2020.
The accounting period is the calendar year. The annual premium
on the policy is P80,000.
Data regarding dividends and cash surrender value are:
2022 2023
Dividend received on December 31 5,000 6,000
Cash surrender value 42,000 47,000

Required: Prepare journal entries for 2021, 2022 and 2023.

ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 22

1.1.21 Life insurance expense 80,000
Cash 80,000

1.1.22 Life insurance expense 80,000

Cash 80,000

12.31.22 Cash 5,000

Life insurance expense 5,000

Cash surrender value 42,000

Life insurance expense 14,000 42T x 1/3
Retained earnings 28,000 42T x 2/3

1.1.23 Life insurance expense 80,000

Cash 80,000

12.31.23 Cash 6,000

Life insurance expense 6,000

Cash surrender value 5,000 47T - 42T

Life insurance expense 5,000

ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 23

PROBLEM 3
FE Company reported the following accounts under current assets
on December 31, 2020:
Cash surrender value 90,000
Policy loan from insurance company 50,000) 40,000
Dividend receivable from insurance company 2,000
The above accounts are the only ones in the statement of financial
position which pertain to the insurance policy or the loan.
Upon investigation, the following data are gathered:
a. The cash surrender value of P90,000 reported in the statement of
financial position is for June 30, 2021. The cash surrender value was
P80,000 on June 30,2020.
b. On June 30, 2020, the entity paid the annual premium of P30,000
minus the ACFAR
dividend declared
2233 LEOPOLDO of MSA
D. MEDINA, CPA, P2,000. 24
c. The loan from the insurance company is a one-year note dated
April 1, 2020. The 12% interest is payable on the date of maturity.
d. The dividend declared was recorded by debiting dividend
receivable and crediting dividend income.

Required:
1. Prepare journal entries to correct the accounts on December 31,
2020.
2. Indicate the financial statement classification of the accounts
related to the insurance policy and the loan.

ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 25

(1)
a entry made
Cash surrender value 10,000
Life insurance expense 10,000

Note : the 50,000 Policy loan from insurance company should not
be deducted from the 90,000
80,000 90,000
difference 10,000
x 6/12
5,000
should be
Cash surrender value 5,000
Life insurance expense 5,000

correcting entry
Life insurance expense 5,000
Cash surrender value 5,000

b no entry made

ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 26

 should be
Prepaid life insurance 14,000 30T-2T = 28T
Life insurance expense 14,000 28T x 6/12

correcting entry
Prepaid life insurance 14,000
Life insurance expense 14,000

c Interest expense 4,500 50Tx12%x9/12

Accrued interest payable 4,500

d entry made
Dividend receivable 2,000
Dividend income 2,000

should be
no entry

correcting entry
Dividend income 2,000
Dividend receivable 2,000

ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 27

 dividend should be actually received and the entry should
be
Cash 2,000
Life insurance expense 2,000

(2)
Current assets
Prepaid life insurance 14,000

Long-term investment 85,000 90T - 5T

Cash surrender value

Current liabilities
Loan payable 50,000
Accrued interest payable 4,500

ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 28

For exercises/drills in CSV, please
answer 22-14 and 22-15 in your
textbook.

Guide answers
14.c 15.d

ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 29

 “Limitations don’t just show
us what we can’t do. It also
opens our eyes to what we
can do instead.”

ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA 30