Bea Company leases an entire shopping complex from Complex Company under a 20-year operating lease. Under the lease agreement, Bea would manage and take the risks of operating the shopping complex for 20 years. It pays a yearly rental of P40,000,000 to Complex Company. Bea uses 20% of the floor area for its own operations. The rest of the floor area is sub-leased to other tenants. Bea Company expects rental income from the sublease to be about P35,000,000 per year for 20 years. The borrowing costs of Bea Company is 8% per year. The cost of constructing the complex incurred by Complex Company is P480,000,000, transaction and other incidental costs amount to P20,000,000. If Bea Company elects to treat its interest in the shopping complex as an investment property, being its interest in the underlying asset, at what amount should the investment property be initially recognized by Bea Company?
Bea Company leases an entire shopping complex from Complex Company under a 20-year operating lease.
Under the lease agreement, Bea would manage and take the risks of operating the shopping complex for
20 years. It pays a yearly rental of P40,000,000 to Complex Company. Bea uses 20% of the floor area for
its own operations. The rest of the floor area is sub-leased to other tenants. Bea Company expects rental
income from the sublease to be about P35,000,000 per year for 20 years. The borrowing costs of Bea
Company is 8% per year. The cost of constructing the complex incurred by Complex Company is
P480,000,000, transaction and other incidental costs amount to P20,000,000. If Bea Company elects to
treat its interest in the shopping complex as an investment property, being its interest in the underlying
asset, at what amount should the investment property be initially recognized by Bea Company?
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