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solution

Very Wealthy Ltd. has investment property that is stated in its balance sheet at a valuation of $1.8 million, and the company is planning to acquire a shopping mall.

The shopping mall is situated on land that Shanghai Property has a right to use until 31 March 2050 (i.e., 45 years remaining from 1 April 2005). The company estimates that the current market value of the existing land use right is approximately $250 million. The shopping mall is estimated to have a useful life of 45 years.

After the existing land use right expires, Shanghai Property has a right to continue to use the land for another 50 years, provided that it pays a lump sum based on the market value at 31 March 2050 for a 50-year land use right.

The shopping mall is now 80% occupied, and all the leases started on 1 April 2004. The shopping mall is currently managed by the property management arm of the property owner on a 10-year contract.

The owner agreed to continue the contract at an annual fee of 10% of the annual rental income receivable by Shanghai Property from the tenants. Although management and operational staff of Very Wealthy will be heavily involved in the operation of the shopping mall, additional administrative expenses to Very Wealthy are not material.

Required:

Assuming that the shopping mall is acquired on 1 April 2005 at $450 million and partly financed by the $400 million loan, you should, for Very Wealthy’s consolidated financial statements for the year ended 31 March 2006:

1. Determine the classification and measurement of the shopping mall in Very Wealthy’s balance sheet.

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