Question :
Dolphin Watching Ltd (DWL) owns and does boats for dolphin watching tours. The main business activity is to take passengers to watch dolphins and whales. Dolphin watching Ltd has a balance date of 31 March.
On 1st April 2011, the management of DWL decided to expand their business activities. DWL brought a new boat for $2 million. The boat is to be chartered for private functions such as weddings and parties. The boat comprises two main components - the main structure (allocated cost $1,500,000) and the engine (allocated cost $500,000).
The management expected that the boat will operate for 20 years. Thus, depending on the usage of the boat, the engine can need to be replaced after operating for 10 years. No proceeds are expected from scrapping the old engine (after 10 years) and its replacement engine (after 20 years). The boat (its main structure), thus, is expected to have a salvage value of $100,000 after 20 years. The boat is expected to be hired out in a constant manner over its 20 year-useful life.
On 31st March 2014, a storm severely damages the engine. Accordingly, DWL scraps the engine. On the 1 April 2014, the company removes the engine at a cost of $700,000. The new engine is expected to propel the boat for the outstanding estimated useful life of the boat, after which the boat will be disposed for $100,000.
Thus, the chartered boat operation has not been very successful. The management of DWL accepts an offer to sell the boat for $1,500,000 on the 31 March 2015.
1. Explain how the boat satisfies the definition of property, plant and equipment.
2. List four estimates and judgments that the management of DWL could have made in accounting for the boat.
ABC Ltd is in the business of giving management consultation services in Parnell area. ABC purchases a property on 1 July 2012 for a cost of $1,500,000. The property consists of building and land. The value of the land is $800,000 at time of purchase. The property is used as seminar rooms and offices. ABC renovates the property in order to make it suitable for its operation. The cost of renovation is $80,000. The renovation is completed in two months after the purchase. ABC has a balance date of 30 June.
1. Evaluate the cost of the property to be recorded in the accounts.
2. Consider ABC depreciates the building part of the property on a straight-line basis. Depreciation is $40,000 each year for the building. The company depreciates its PPE to the nearest month. On 1 July 2013, the property is revalued to $1,700,000, of which the land portion valued by $100,000. Prepare journal entries to reflect the revaluation for both building and land of the property.