Reference no: EM13586686
Dolphin Watching Ltd (DWL) owns and operates boats for dolphin watching tours. The main business activity is to take passengers to watch whales and dolphins. Dolphin watching Ltd has a balance date of 31 March.
On 1 April 2011, the management of DWL decided to expand their business activities. DWL purchased 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 can operate for 20 years. However, depending on the usage of the boat, the engine may 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), however, 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 31 March 2014, a storm severely damages the engine. Consequently, DWL scraps the engine. On the 1 April 2014, the company replaces the engine at a cost of $700,000. The new engine is expected to propel the boat for the remaining estimated useful life of the boat, after which the boat will be disposed for $100,000.
However, 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.
- Describe how the boat satisfies the definition of property, plant and equipment.
- Prepare journal entries relating to the boat using the cost model from 1 April 2011 to 31 March 2015 (4 financial years).
- List (in bullet points) four estimates and judgements that the management of DWL would have made in accounting for the boat.