Question

Entity A is a listed company that operates the cruise ship business. One of the cruise ships was purchased on 1 Oct 2011. This cruise ship is made up of three main components: (1) cruise’s fabric, (2) cabins and entertainment area and (3) fittings propulsion system.

Details of the cost of its components and their estimated useful lives are as below:

Components Original cost Depreciation basis

(1) Cruise’s fabric (hull, decks, etc.) HK$37,500,000 50 years straight-line

(2) Cabins and entertainment area fittings HK$18,750,000 15 years straight-line

(3) Propulsion system HK$12,500,000 useful life of 80,000 hours

On 30 Sep 2019, no further capital expenditure had been incurred on the cruise ship.

In the year ended 30 Sep 2019, the cruise had experienced a high level of engine trouble, which had cost Entity A considerable revenue loss and compensation costs.  The measured expired life of the propulsion system on 30 Sep 2019 was 50,000 hours. Due to the unreliability of the engines, a decision was made by Entity A on 1 Oct 2019 to replace the whole of the propulsion system at a cost of HK$17,500,000. The old propulsion system was also sold to a second-hand machinery shop with a loss on disposal of $4,250,000. The cash from the disposal was received on 20 Oct 2019.  The expected life of the new propulsion system was 160,000 hours and in the year ended 30 Sep 2020, the cruise had used its engines for 10,000 hours.

At the same time as the propulsion system replacement, Entity A took this opportunity to upgrade the cabin and entertainment facilities at a cost of HK$7,500,000 and repaint the cruise’s fabric at a cost of HK$2,500,000 respectively. After the upgrade of the cabin and entertainment area fittings, it was estimated that their remaining useful life was 10 years.

For calculating depreciation, all the works on the cruise can be assumed to have been completed on 1 Oct 2019. All residual values can be taken as NIL.

REQUIRED:

(1) Measure the depreciation expense of the Cruise’s Fabric for the year ended 30 Sep 2020.

Answer = $

(2) Measure the depreciation expense of the Cabins and entertainment area fittings for the year ended 30 Sep 2020.

Answer = $

(3) Measure the depreciation expense of the Propulsion system for the year ended 30 Sep 2020.

Answer = $

(4) Measure the carrying amount of the Cruise’s Fabric on 30 Sep 2020.

Answer = $

(5) Measure the carrying amount of the Cabins and entertainment area fittings on 30 Sep 2020.

Answer = $

(6) Measure the carrying amount of the Propulsion system on 30 Sep 2020.

Answer = $

(7) Measure the carrying amount of Entity A’s cruise ship on 30 Sep 2020.

Answer = $

(8) Measure the cash received from the sale of the old propulsion system.

Answer = $

Answer 1

Depreciation and Carrying Value:

Please find answers to the above-given questions below. Please give a thumbs up if you find this answer helpful!

(1) Measure the depreciation expense of the Cruise’s Fabric for the year ended 30 Sep 2020.

Answer = HK$750,000

Calculation: Depreciation = Cost of Cruise's Fabric / Useful life = HK$ 37,500,000 / 50 Years = HK$ 750,000

(2) Measure the depreciation expense of the Cabins and entertainment area fittings for the year ended 30 Sep 2020.

Answer = HK$ 1,625,000

Calculation: Depreciation = (Cost + Addition) / Remaining useful life = (HK$ 8,750,000 + HK$ 7,500,000)/ 10 Years = HK$ 1,625,000.

(3) Measure the depreciation expense of the Propulsion system for the year ended 30 Sep 2020.

Answer = HK$ 1,093,750

Calculation: Depreciation = (New System's Cost / Useful hours ) X Hourse Used = (HK$ 17,500,000 / 160,000 Hours) X 10,000 Hours = HK$ 1,093,750

(4) Measure the carrying amount of the Cruise’s Fabric on 30 Sep 2020.

Answer = HK$ 30,750,000 (See notes below)

(5) Measure the carrying amount of the Cabins and entertainment area fittings on 30 Sep 2020.

Answer = HK$ 14,625,000 (See notes below)

(6) Measure the carrying amount of the Propulsion system on 30 Sep 2020.

Answer = HK$ 16,406,250 (See notes below)

(7) Measure the carrying amount of Entity A’s cruise ship on 30 Sep 2020.

Answer = HK$ 61,781,250 (See notes below)

(8) Measure the cash received from the sale of the old propulsion system.

Answer = HK$ 437,500

Calculation: Cash Recived = Opening Carrying Value - Loss on Sale = HK$ 4,687,500 - HK$ 425,000 = HK$ 437,500

Notes for Carrying Values at begging of period and end of period:

Particulars	Cruise's Fabric	Cabins and entertainment area fittings	Propulsion system	Total
Cost	HK$37,500,000	HK$18,750,000	HK$12,500,000	HK$68,750,000
Useful Life	50 Years	15 Years	80,000 Hours
Depreciation Period/ Hours	8 Years	8 Years	50,000 Hours
Less: Accumulated Depreciation [(Cost/ Useful life) X Depreciation Period/Hours]	HK$6,000,000	HK$10,000,000	HK$7,812,500	HK$23,812,500
Carrying Value as on September 30, 2019	HK$31,500,000	HK$8,750,000	HK$4,687,500	HK$44,937,500

Particulars	Cruise's Fabric	Cabins and entertainment area fittings	Propulsion system	Total
Opening Carrying Value	HK$31,500,000	HK$8,750,000	HK$4,687,500	HK$44,937,500
Sale of the propulsion system	-	-	(HK$4,687,500)	(HK$4,687,500)
Addition of New propulsion system		-	HK$17,500,000	HK$17,500,000
Upgrading of cabin and entertainment facilities	-	HK$7,500,000	-	HK$7,500,000
Depreciation	(HK$750,000)	(HK$1,625,000)	(HK$1,093,750)	(HK$3,468,750)
Carrying Value as on September 30, 2020	HK$30,750,000	HK$14,625,000	HK$16,406,250	HK$61,781,250