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Dear sir,
As the answer of kit that relates to the Funnels, could you please explain me 3 issues that I couldn’t get through:
1. The cost of the Funnels has been initially determined by replacement cost. So where is the replacement cost mentioned in IAS 16?
2. The associated depreciation charge determined using the rate for the vessel (over 30 years). Why is it not 15 years – its useful life?
3. Why were the carrying amouont of the replacement funnels capinalised but not expensed to PL?Thanks sir.
I am not sure which kit you have as I work with the BPP one at this question is not in there. It sounds like a financial reporting question rather than strategic business reporting.
All I can say is that when you revalue PPE depreciated replacement cost is sometimes used for machinery where it is not possible to find out the fair value of the assets in any other way.
If the question is about a ship it may be that the funnel is seen as a separate lead depreciable asset with its own useful life.
Sorry sir that I wrongly typed question number. It’s the Q18 in the SBR KIT that is effective to June 2020.
The key points in the answer are:
1. Residual value must be remeasured every year with a subsequent adjustment to depreciation.
2. When the ship was purchased they should separate it into its components:
– fabric of ship to be depreciated over 30 years
– part of the cost of the engine to be depreciated over 30 years
-the balance of the cost of the engine which represents the overhaul to be depreciated over 10 years
– funnels to be depreciated over 15 years.I think what the answer is trying to say is that as the company has not been doing any of this they will have to make some adjustments.
Please re-read the BPP answer and see if it is now making sense. If it isn’t please come back with any more questions.
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