Question 1

Hedge Fun Ltd. (HF) is a Singaporean company manufacturing construction and building materials such as welded wire mesh, reinforcement bars, mild steel angle bars, etc. HF acquired a warehouse (with a total area of 10,000 square feet) by cash on 1 January 2021 to store its finished goods. The acquisition cost of the warehouse is $2,400,000.

HF depreciates the warehouse using the straight-line depreciation method with no residual value over its estimated useful life of 80 years. The warehouse space could be leased out separately under a finance lease. The market value of each square foot is the same.

Due to a decrease in the demand for building materials in May 2021, HF reduced its production volume and decided to rent out a portion of the warehouse. As a result, HF ceased the use of 4,000 square feet of the warehouse on 1 July 2021 and successfully rented it out on a one-year operating lease to a tenant on 1 October 2021 for $12,000 per month. The rental income is receivable on the last day of each month.

A year later, the recovery of the property market increased the demand for construction and building materials. In turn, HF restored its production volume. On 30 September 2022, HF didn’t renew the lease with its existing tenant and immediately occupied the entire warehouse for its own storage purposes.

HF’s accounting policy is to carry its Property, Plant and Equipment (PPE) at cost and its Investment Property (IP) at fair value. HF has its financial year end on 31 December.