1. Assume there are three separate real estate companies US Realty (which uses the cost model), UK Realty (which uses the revaluation model, and International Realty (which uses the fair value model). Assume that on December 31, 2003, each company pays £1,000 cash to obtain investment property comprising of land with negligible value and an office building worth £1,000. The building has a 10 year useful life, has no residual value, and is expected to provide a constant stream of economic benefits over time. What is the accounting entry for each company for the following four scenarios:
a. On December 31, 2003 acquisition
b. On December 31, 2004 assuming the investment property fair value is £1,300 c. On December 31, 2005 assuming the investment property fair value is £ 1,100 d. On December 31, 2006, assuming the investment property fair value is £ 500.
US Realty (cost model): 1000, 900, 800, 700
UK Realty (revalution model): 1000, 1300, 1100, 500
International Realty (Fair value): 1000, 1000+300(unrealized gain), 1300-200(unrealized loss), 1100-600(unrealized loss)
Using Exhibit 10 as reference, what financial analysis challenges arise as a result of these differing accounting models?
2. Which model (cost, revaluation, or fair value) provides the most relevant information? Which model provides the most reliable information? Fair value is the most relevant and the cost is the most reliable.
3. How does each model affect Land Securities’ balance sheet? Income statement? Can the firm assess the impact of adopting the fair value model on previous years’ key performance metrics, such as “profit on ordinary activities”?
4. Which model, cost or fair value, would you recommend Land Securities adopt? Why?
Although cost method provides more reliable evaluations, I recommend Land Securities adopt the fair value method which gives more relevant information in the company’s financial statements....
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