Nevine Corporation owns and manages a small10- store shopping centre and classifies the shopping centre as an investment property. Nevine has a May 31 year end and initially recognized the property at its acquisition cost of $10.8 million on June 2, 2013. The acquisition cost consisted of the purchase price of $10 million, costs to survey and transfer the property of $500,000, and legal fees for the acquisition of the property of $300,000. Nevine determines that approximately 25% of the shopping centre's value is attributable to the land, with the remainder attributable to the building. The following fair values are determined:
Date Fair Value
May 31, 2014 ................. $10,500,000
May 31, 2015 ................. $10,400,000
May 31, 2016 ................. $11,000,000
Nevine expects the shopping centre building to have a 35-year useful life and a residual value of $1.1 million. Nevine uses the straight-line method for depreciation.
Instructions
(a) Assume that Nevine decides to apply the cost model. What journal entries, if any, are required each year, and how will the investment property be reported on each year-end statement of financial position?
(b) Assume that Nevine decides to apply the fair value model. Prepare the journal entries, if any, required at each year end. In addition, explain how the property would be reported if Nevine prepared a statement of financial position shortly after acquisition in 2013.