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Questions and Answers
A company owns a building, using 30% of it for administrative offices and leasing out the remaining 70% under operating leases. The portions can be sold separately. How should this property be classified?
A company owns a building, using 30% of it for administrative offices and leasing out the remaining 70% under operating leases. The portions can be sold separately. How should this property be classified?
- 30% as PPE and 70% as investment property. (correct)
- Entirely as inventory.
- Entirely as investment property.
- Entirely as property, plant, and equipment (PPE).
Which of the following factors would suggest that a lease should be classified as a finance lease rather than an operating lease?
Which of the following factors would suggest that a lease should be classified as a finance lease rather than an operating lease?
- The lease contains a title transfer to the lessee at the end of the lease term. (correct)
- The lease term is for a minor part of the economic life of the asset.
- The fair value of the asset is significantly less than the present value of the lease payments.
- The lessee can cancel the lease at any time without significant penalty.
A real estate company acquires a plot of land with the intention of constructing apartments for sale to customers. How should this land be classified in the company's financial statements?
A real estate company acquires a plot of land with the intention of constructing apartments for sale to customers. How should this land be classified in the company's financial statements?
- Intangible asset.
- Investment property.
- Property, plant, and equipment (PPE).
- Inventory. (correct)
A company owns a building that provides serviced apartments. The services provided to tenants are a significant component of the arrangement. How should the building be classified?
A company owns a building that provides serviced apartments. The services provided to tenants are a significant component of the arrangement. How should the building be classified?
A company purchases land with the intention of holding it for long-term capital appreciation. What is the appropriate classification of this land?
A company purchases land with the intention of holding it for long-term capital appreciation. What is the appropriate classification of this land?
Flashcards
Investment Property
Investment Property
Land or building held to earn rentals, for capital appreciation or both.
Finance Lease
Finance Lease
A lease that transfers substantially all the risks and rewards of ownership.
Operating Lease
Operating Lease
A lease where the lessor retains substantially all the risks and rewards of ownership.
Inventory Property
Inventory Property
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Mixed-Use Property
Mixed-Use Property
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Study Notes
- Investment property: Land or building (or part of) held to earn rentals, capital appreciation, or both.
- Investment property should not be used for:
- Owner occupancy
- Production or supply of goods/services
- Administrative purposes
Finance vs. Operating Lease
- Finance Lease: Substance and form are not the same; may appear as a lease but functions as a purchase.
- Often includes a bargain purchase option that the lessee is reasonably certain to exercise.
- Operating Lease: Substance and form are the same
- It functions as a true lease.
Property Classification
- Property intended for sale in the ordinary course of business is not investment property.
- It falls under inventory.
- If land or building is used for:
- Supply of goods, services, or administrative purposes, it is classified as property, plant, and equipment (PPE), not investment property.
Examples of Investment Property
- Land held for long-term capital appreciation.
- Land held for currently undetermined future use.
- Building owned and leased out under operating lease.
- Property being constructed or developed for future investment property use
Mixed-Use Property
- If a property has a portion for owner-occupancy and another for investment purposes, it can only be treated separately if the portions can be sold or leased out separately.
- Otherwise, it is treated as owner-occupied property, unless the owner-occupied portion is insignificant.
Ancillary Services
- If ancillary services provided are insignificant to the property, it can still be considered investment property.
- Example: A serviced apartment where services are minor.
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Description
Investment property is land or buildings held to earn rentals or for capital appreciation. It excludes properties for owner occupancy or production. Finance leases function as purchases, unlike operating leases which are true leases.
