On 1 January 2011, Bersih Bhd purchased a five-storey building in Perlis for RM800,000. The estimated useful life of the building is 25 years. One floor was used for administrative purposes of Bersih Bhd and the rest of the floor was rented out to tenants. Beginning 1.1.2016, Bersih Bhd used all the four floors of the building for production and supply of its goods. The market value of building in January 2012, 2014 and 2016 was RM950,000, RM1 million and RM1.5 million, respectively.

Question

On 1 January 2011, Bersih Bhd purchased a five-storey building in Perlis for RM800,000. The estimated useful life of the building is 25 years. One floor was used for administrative purposes of Bersih Bhd and the rest of the floor was rented out to tenants. Beginning 1.1.2016, Bersih Bhd used all the four floors of the building for production and supply of its goods. The market value of building in January 2012, 2014 and 2016 was RM950,000, RM1 million and RM1.5 million, respectively.

Bersih Bhd uses the fair value model to measure its investment properties. It is the policy of Bersih Bhd to depreciate its property, plant and equipment using straight line method.

Required: Explain how Bersih Bhd records the building in 2011, 2012, 2014 and 2016 in its book.

Answer 1

In 2011, when Bersih Bhd purchased the building, it would be recorded as an investment property at its cost of RM800,000.

In 2012, since the market value of the building increased to RM950,000, Bersih Bhd would need to recognize this increase in fair value in its books. The increase would be recorded as a gain in the income statement and the investment property would be revalued to RM950,000 in the balance sheet.

In 2014, the market value of the building increased again to RM1 million. Bersih Bhd would record this increase in fair value as a gain in the income statement and revalue the investment property to RM1 million in the balance sheet.

In 2016, when Bersih Bhd started using all four floors of the building for production, the building would no longer be classified as an investment property. It would be reclassified as property, plant, and equipment and depreciated over its estimated useful life of 25 years using the straight-line method. The reclassification would involve transferring the carrying amount of the building from investment property to property, plant, and equipment.

Additionally, since the market value of the building increased to RM1.5 million in 2016, Bersih Bhd would need to recognize this increase in fair value. The increase would be recorded as a gain in the income statement and the carrying amount of the building would be adjusted to RM1.5 million in the balance sheet.