Reference no: EM132926475
Question - Tootlealong Ltd is a public transport company that runs bus services. The company's management currently uses historical cost values but is considering alternative valuations of its non-current assets. The company's accountant has collected a range of values on three of its buses (non-current assets). The information is presented in the table below:
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Tootlealong Lt
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Bus x
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Bus y
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Bus z
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Historical cost of asset
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150000
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180000
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200000
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Annual depreciation rate
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20.00%
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10.00%
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20.00%
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Expected sales value net of all selling costs
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83800
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150000
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143000
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Current purchase price of an asset in a similar condition
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165000
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218000
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210000
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The following additional notes on the three buses may be relevant:
Bus X is used as a stand-by vehicle for when other buses are off the road due to breakdowns or scheduled maintenance. If the use of Bus X was not available it is estimated that Tootlealong Ltd would have to spend £21,000 per annum to rent an equivalent bus from another firm. Annual maintenance costs for Bus X is £9,600. Due to its contractual obligations to provide a continuous service, the company has to have a stand-by facility for when its vehicles are off the road.
Bus Y is one of the company's regularly used vehicles. It has an expected life of 10 years and the company is able to generate £14,200 annually during its expected life from the use of this asset.
Bus Z is another of the company's frequently used vehicles. It has an expected life of 5 years and is able to generate £37,200 annually for the span of its expected life. The company's expected return on capital invested is 10%.
Required -
a) What is deprival value? How useful is an alternative valuation such as deprival value for Tootlealong Ltd's managers?
b) Calculate the deprival value for Buses X, Y and Z to the nearest £1. You should ignore the effects of taxation.
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