Kayte operates in the shipping industry and owns vessels for transportation. Kayte’s vessels constitute a material part of its total assets. The economic life of the vessels is estimated to be 30 years, but the useful life of some of the vessels is only ten years because Kayte’s policy is to sell these vessels when they are ten years old. Kayte estimated the residual value of these vessels at sale to be half of acquisition cost, and this value was assumed to be constant during their useful life. Kayte argued that the estimates of residual value used were conservative in view of an immature market with a high degree of uncertainty and presented documentation which indicated some vessels were being sold for a price considerably above carrying value. Broker valuations of the residual value were considerably higher than those used by Kayte. Kayte argued against broker valuations on the grounds that it would result in greater volatility in reporting.
Kayte keeps some of the vessels for the whole 30 years and these vessels are
required to undergo an engine overhaul in dry dock every ten years to restore their service potential, hence the reason why some of the vessels are sold. The residual value of the vessels kept for 30 years is based upon the steel value of the vessel at the end of its economic life. At the time of purchase, the service potential, which must be restored by the engine overhaul, is measured based on the cost as if it had been performed at the time of the purchase of the vessel. In the current period, one of the vessels had to have its engine totally replaced after only eight years. Normally, engines last for the 30-year economic life if overhauled every ten years. Additionally, one type of vessel was having its funnels replaced after 15 years, but the funnels had not been depreciated separately.

Required: 

Discuss the accounting treatment of the above transactions in the financial statements of Kayte.