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I couldn’t get a way through this question. did not understand the calculation of depreciation for overhaul costs.
A shipping company is required by law to bring all its ship into dry dock every five years for a major inspection and overhaul. A ship that cots 20 m with a 20 yr life must have a major overhaul of 5 yrs. the estimated cost of the 1st overhaul is 5m.overhaul CApital
COST 5 15
years 5 20Annual dep 1 0.75
total annual dep for 1st five year will be 1.75m, and the CV of ship at the end of year will be at 11.25mThe actual overhaul costs incurred at the end of year 5 are 6m. here I did not understand why 1 is added and made the overhaul cost 6m.
from year 6-10
we have kept capital cost as 11.25 (no changes made) but why we are adding 1 in overhaul cost?“A ship that cots 20 m with a 20 yr life must have a major overhaul of 5 yrs. the estimated cost of the 1st overhaul is 5m.” – that’s not clear to me that the $5m first overhaul is included within the $20m cost price
“and the CV of ship at the end of year will be at 11.25m” seems to have missed the number 5 off! should this be “the cv at the end of year 5 will be at $11.25m”?
“The actual overhaul costs incurred at the end of year 5 are 6m. here I did not understand why 1 is added and made the overhaul cost 6m.” – we’re adding $1m because the estimate of $5m was just that – an estimate. Now we know the precise figure and that’s why we’re adding the $1m
yes 5m is included within 20m.
sir is that 1m, a depreciation amount? if yes why are we adding just 1m? in year 5 our total depreciation will be 5, isn’t it?
I am not understanding it clearly ”we’re adding $1m because the estimate of $5m was just that – an estimate. Now we know the precise figure and that’s why we’re adding the $1m”We guessed $5m so we depreciate that $5m over 5 years and then, at the end of 5 years, we get an invoice not for $5m but for $6.
It’s like an under-provision for depreciation or an adjustment to an accounting estimate. When we eventually know the correct figure at the end of year 5 we can make an adjustment in the year 5 statement of profit or loss by having this additional expense on top of the “usual $1m”
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