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Phoenix Real Estate Limited (Phoenix) is a property developer in China. In 2003, Phoenix acquired the land use rights of two pieces of land in Beijing for hotel development.

Property 1: Since the date of the acquisition of the land, the board of Phoenix has decided to run the hotel on its own and commenced the pre-operating activities of the hotel on 1 January 2005, when the development ws completed and the hotel was available for its intended use. The hotel’s grand opening took place on 1 July 2005.

Property 2: Since the date of acquisition of the land, the board of Phoenix decided to lease the whole property to earn rental. A lease agreement was entered into to lease the whole property to its holding company (the Tenant) for a period of 18 years for the operation of a hotel. According to the lease agreement, in addition to the minimum annual rental, Phoenix is entitled to receive a turnover rent that represents the excess of 5% annual revenue of the hotel operation over the minimum rental. The monthly revenue amount of the hotel operation is provided by the Tenant at the close of business of each month-end date.

Other information on these two properties:

Phoenix has adopted the cost model under IAS 16 for property, plant and equipment and the fair value model under IAS 40 for investment property (buildings only). Depreciation is provided to write off the cost of property, plant and equipment using the straight-line method. The land use right is considered as a lease and accounted for in accordance with the requirements under IAS 17. Amortisation of the cost of the land during the construction period is capitalised as part of the development cost of the property.


1. Calculate the amount of (a) land use right and (b) carrying amount of the building for each property to be reflected in Phoenix’s balance sheet as at 31 December 2005.

2. Explain the accounting treatment for the turnover rent under the lease agreement entered into with the Tenant for Property 2 in Phoenix’s financial statements.


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