You are auditing Army Corporation's financial statements for the period ended December 31, 2021. Army Corporation is engaged in several lines of businesses: developing property for sale; holding real estate property for rental purposes and holding real estate properties for capital appreciation purposes. Four properties are currently classified as investment property. Your audit investigations revealed the following regarding the said properties:Real Property A was acquired in January of 2020 at P100M. The building's sewerage system was not operating and Army Corporation decided to incur expenditure amounting to P5M to make the sewerage system operational. It also decided to undertake major maintenance on the system at the end of 5 years. The company used the fair market model for this asset and has capitalized the asset at P115M (being the cost of P100M, expenditure of P5M and the present value of the planned expenditure at the end of five years at P10M). Fair value of the property at the end of 2020 and 2021 were at P120M and P140M, respectively.Real Property B was acquired in June of 2016 at a total acquisition cost of P56M. The property had a 20-year useful life. The carrying value of the property based on its fair value as of December 31, 2020 was at P40M. at the beginning of 2021. the company spent P5M to install a modern upgraded glass roof on the property. Management believes that it is important for the property to have a modern roof system, to attract and retain tenants and resist downward pressure on rents. It also enables management to reduce electricity costs. The fair market value of the property as at December 31, 2021 was at P48M.Real Property C was acquired in 2020 at a total cost of P40M and had a carrying value of P42M which is based on the fair market value as of December 31, 2020. At the beginning of 2021, the company decided to redevelop the property and shall thereafter be held for sale. The redevelopment which costed P4M will significantly improve and enhance the property. The fair market value of the property as at December 31, 2021 was at P50M.Real Property D was acquired in 2020 at a total cost of P20M and had a carrying value of P25M which is based on the fair market value as of December 31, 2020. This property will also be sold, but significant redevelopment is not necessary, although some basic repairs will be undertaken. The fair market value of the property as at December 31, 2021 was at P30M. Requirements:1. What is the correct initial cost of Real Property A?2. What is the unrealized holding gain to be recognized in the 2021 profit or loss in relation to Real Property B?

The determination of correct initial cost of Real property A and the unrealised holding gain to be…

Answered: You are auditing Army Corporation's…

Auditing: A Risk Based-Approach to Conducting a Quality Audit

10th Edition

ISBN:9781305080577

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter14: Activities Required In Completing A Quality Audit

Section: Chapter Questions

Problem 87RSCQ

See similar textbooks

Related questions

Question

You are auditing Army Corporation's financial statements for the period ended December 31, 2021. Army Corporation is engaged in several lines of businesses: developing property for sale; holding real estate property for rental purposes and holding real estate properties for capital appreciation purposes. Four properties are currently classified as investment property. Your audit investigations revealed the following regarding the said properties:

Real Property A was acquired in January of 2020 at P100M. The building's sewerage system was not operating and Army Corporation decided to incur expenditure amounting to P5M to make the sewerage system operational. It also decided to undertake major maintenance on the system at the end of 5 years. The company used the fair market model for this asset and has capitalized the asset at P115M (being the cost of P100M, expenditure of P5M and the present value of the planned expenditure at the end of five years at P10M). Fair value of the property at the end of 2020 and 2021 were at P120M and P140M, respectively.
Real Property B was acquired in June of 2016 at a total acquisition cost of P56M. The property had a 20-year useful life. The carrying value of the property based on its fair value as of December 31, 2020 was at P40M. at the beginning of 2021. the company spent P5M to install a modern upgraded glass roof on the property. Management believes that it is important for the property to have a modern roof system, to attract and retain tenants and resist downward pressure on rents. It also enables management to reduce electricity costs. The fair market value of the property as at December 31, 2021 was at P48M.
Real Property C was acquired in 2020 at a total cost of P40M and had a carrying value of P42M which is based on the fair market value as of December 31, 2020. At the beginning of 2021, the company decided to redevelop the property and shall thereafter be held for sale. The redevelopment which costed P4M will significantly improve and enhance the property. The fair market value of the property as at December 31, 2021 was at P50M.
Real Property D was acquired in 2020 at a total cost of P20M and had a carrying value of P25M which is based on the fair market value as of December 31, 2020. This property will also be sold, but significant redevelopment is not necessary, although some basic repairs will be undertaken. The fair market value of the property as at December 31, 2021 was at P30M.

Requirements:

1. What is the correct initial cost of Real Property A?

2. What is the unrealized holding gain to be recognized in the 2021 profit or loss in relation to Real Property B?

Expert Solution

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Follow-up Questions

Read through expert solutions to related follow-up questions below.

Follow-up Question

Assuming cost model was used for the Real Property B, what is the carrying value of the property as of December 31, 2021?

Solution

by Bartleby Expert

SEE SOLUTION

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.