On 1 July 2023, Eagle Airlines acquired a new aeroplane for a total cost of \(\$ 20\) million. A breakdown of the costs to build the aeroplane was given by the manufacturers.

All costs include installation and labour costs associated with the relevant part. It is expected that the aircraft will be kept for 10 years and then sold. The main value of the aircraft at that stage is the body and the engines. The expected selling price is \(\$ 4.2\) million, with the body and engines retaining proportionate value.
Costs in relation to the aircraft over the next 10 years are expected to be as follows.

(a) Aircraft body. This requires an inspection every 2 years for cracks and wear and tear, at a cost of \(\$ 20000\).

(b) Engines. Each engine has an expected life of 4 years before being sold for scrap. It is expected that the engines will be replaced in 2027 for \(\$ 9\) million and again in 2031 for \(\mathbf{\$ 1 2}\) million. These engines are expected to incur annual maintenance costs of \(\$ 600\) 000. The manufacturer has informed Eagle Airlines that a new prototype engine with an extra \(10 \%\) capacity should be on the market in 2029 , and that existing engines could be upgraded at a cost of \(\$ 2\) million.

(c) Fittings. Seats are replaced every 3 years. Expected replacement costs are \$2.4 million in 2026 and \$3 million in 2031. The repair of torn seats and faulty mechanisms is expected to cost \(\$ 200000\) p.a. Carpets are replaced every 5 years. They will be replaced in 2029 at an expected cost of \(\$ 130000\), but will not be replaced again before the aircraft is sold in 2033. Cleaning costs amount to \(\$ 20000\) p.a. The electrical equipment (such as the TV) for each seat has an annual repair cost of \(\$ 30000\). It is expected that, with the improvements in technology, the equipment will be totally replaced in 2029 by substantially better equipment at a cost of \(\$ 700000\). The electrical equipment in the cockpit is tested frequently at an expected annual cost of \(\$ 500000\). Major upgrades to the equipment are expected every 2 years with estimated costs of \(\$ 500000\) (in 2025), \(\$ 600000\) (in 2027), \(\$ 690000\) (in 2029) and \(\$ 820000\) (in 2031). The upgrades will take into effect the expected changes in technology.

(d) Food preparation equipment. This incurs annual costs for repair and maintenance of \(\$ 40\) 000. The equipment is expected to be totally replaced in 2029.

Required 1. Discuss how the costs relating to the aircraft should be accounted for with respect to each of the following.

(a) Aircraft body

(b) Engines

(c) Fittings

(d) Food preparation equipment 2. Determine the expenses recognised for the 2023-24 financial year.0

Transcribed Image Text:

Aircraft body Engines (2) Fitting out of aircraft: Seats Carpets Electrical equipment: Passenger seats Cockpit Food preparation equipment $6 000 000 8 000 000 2 000 000 100 000 400 000 3 000 000 500 000