Reference no: EM132962674
Sea Leisure Ltd is a company specializing in world cruise holiday packages using its own luxurious cruise ship specially built for the purpose. The company owned one cruise ship with a carrying amount of $900 million as at 31st December, 20X5. Due to recent adverse changes in economic conditions world-wide, the company is in the process of estimating the recoverable amount of the cruise ship.
Information available to date is as follows:
1. Information on the cruise ship
Original cost $1,500 million
Carrying amount @ 31st Dec 20X5 $900 million
Estimated remaining useful life 8 years
2. Information relating to net selling price
(a) The company's competitor has just sold 2 similar cruise ships for $500 million each as a result of forced sale.
(b) In June 20X5, the company was approached by the government to sell the cruise ship for $550 million. The government intended to convert the cruise ship for military purposes.
(c) A new cruise ship of similar class is expected to have a market value of $1,400 million.
(d) A similar cruise ship (with similar useful life) was sold in the market in August 2005 for $650 million.
(e) As at year ending 31st December, 20X5, management of Sea Leisure Ltd obtained reports from several professional ship auctioneers, which indicated that sales of cruise ships of similar class as the one owned by the company would probably be subject to a general discount of 20%.
(f) The company will need to incur $19 million to overhaul the engine and navigation systems in order to bring the ship into saleable condition. Legal cost is expected to be $ 0.4 million and stamp duty $0.6 million.
(g) The company recently painted the cruise ship at a cost of $1 million. This amount has not been paid and is recognized as a liability as at year-end.
3. Information relating to value-in-use
(a) A similar cruise ship that had reached the end of its useful life and which operated under conditions similar to the company was sold recently for $166 million. The cost of disposal was negligible.
(b) Management's best estimate of future net operating cash flows from the cruise ship is $140 million for the year ended 31st December 20X6 and a growth rate of 5% is expected for the industry as a whole. Due to the current climate, the company decided to use a growth rate of 1%.
(c) The management expects to restructure its operation next year. The restructuring will streamline the existing network of tour operators, resulting in an estimated increase in cash flows of 30% in year 20X7.
(d) Capital expenditure necessary to maintain the original standard of performance is expected to be $20 million in year 20X6. In addition, the company will be committing a further $80 million is year 20X6 to enhance the cruise ship's fuel consumption. This will result in a reduction of fuel consumption amounting to 20% of the originally assessed standard of performance.
(e) The cruise ship is financed by a fixed rate loan from a local bank. Annual interest payments amount to $80 million.
(f) The management of Sea Leisure Ltd intends to utilize a discount factor of 10% which takes into account the specific risks of the projected cash flows.
Required:
Problem (a) Determine the net selling price of the cruise ship as at 31st December, 20X5.
Problem (b) Compute the value-in-use of the cruise ship as at 31st December, 20X5.
Problem (c) Determine the amount of impairment loss (if any), as at 31st December, 20X5.
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