Holdem
Properties Corporation purchased a parcel of land in 2010 for $1 million with
the intent to construct a building on the property in the near future. At the
time of purchase, and in the subsequent financial statements for the years
ended December 31, 2010, and 2011, Holdem applied the cost model and measured
and reported the land at its acquisition cost as allowed in IAS 16. Holdem follows
IFRS and management decided in early 2012 that the land qualifies as an
investment property under IAS 40 and that Holdem is to apply the fair value
model of accounting for investment properties effective immediately because the
company believes that changing the measurement model will provide more relevant
information. Independent appraisals indicate that the land’s fair value at
December 31, 2010, and 2011, was $980,000 and $1,050,000, respectively.
Holdem’s reported retained earnings at December 31, 2010, and 2011, were
$230,000 and $290,000, respectively.
Instructions
(a)
Prepare the original balance sheets and income statements for the affected
accounts.
(b)
Prepare Holdem’s journal entry, if any, to record the change in accounting
policy.
(c)
Prepare the restated balance sheets and income statements for the affected
accounts.
(a) For the years ended December 31, 2010 and 2011,
the land was original measured and reported on the balance sheet at its cost of
$1,000,000 with no effects reported in net income (as there is no depreciation
on land).
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2011
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2010
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BALANCE SHEET (partial)
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Land, at cost
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$1,000,000
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$1,000,000
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Retained earnings, ending balance
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290,000
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230,000
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INCOME STATEMENT (partial)
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Gain (loss) in value of Land – Investment Property
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$0
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$0
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(b) The entry required January 1, 2012 to restate
opening Retained Earnings is:
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Land –
Investment Property......
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50,000
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Retained Earnings..........
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50,000
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The opening Retained Earnings in 2012 would
have to be increased by the net amount of $50,000 for the change in fair value
of the investment property up to December 31, 2011 (equal to the fair value
holding loss in 2010 of $20,000 and the fair value holding gain in 2011 of
$70,000).
This is a considered an acceptable change
in accounting policy since changing the measurement model will provide more
relevant information. Thus, it is accounted for retroactively as a change in
accounting policy.
(c) The previous financial statements would be
restated as follows to include the change in fair value of the investment
property in net income and related presentation on the balance sheet:
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2011
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2010
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(Restated)
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(Restated)
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BALANCE SHEET (partial)
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Land, at fair value
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$1,050,000
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$980,000
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Retained earnings, ending balance
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340,000
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210,000
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INCOME STATEMENT (partial)
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Gain (loss) in value of Land – Investment Property
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$70,000
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$(20,000)
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STATEMENT OF SHAREHOLDERS’ EQUITY / RETAINED
EARNINGS (partial)
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Opening retained earnings, as originally stated
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$290,000
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$230,000
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Adjusted for 2010 decline in fair value
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(20,000)
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(20,000)
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Adjusted for 2011 increase in fair value
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70,000
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_
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Opening retained earnings, as restated for change in
accounting policy
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$340,000
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$210,000
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