A firm owns and operates a ferry that transports passengers, their motor vehicles, and goods between the
Question:
A firm owns and operates a ferry that transports passengers, their motor vehicles, and goods between the mainland and an island. The ferry service is the main business of the firm. Given the following facts:
• On 1 January 2016 the firm purchases a new ferry for \($1\) million cash. The ferry comprises two main components—the main structure (cost \($800,000\) and the engine (cost \($200,000\).
• The firm’s management expect that after operating the ferry for twenty years the ferry will be scrapped. However, management expect to replace the ferry’s engine after operating it for ten years. No proceeds are expected from the scrapping of both the old engine (after ten years) and the ferry and its replacement engine (after twenty years).
• The ferry’s passenger carrying capacity is constant over its twenty-year economic life.
• On December 31, 2019 a storm severely damages the engine. Consequently, the firm scraps the engine. On January 1, 2020 the firm replaces the engine at a cost of \($300,000\). The new engine is expected to propel the ferry for the rest of its estimated useful life, after which the ferry and the engine will be scrapped.
• On December 2020, in response to an unsolicited offer, the firm disposes of the ferry for \($910,000\).
1. What information about that firm’s ferry would a potential investor find useful? Why do you think that information would be useful?
2. Is the ferry an asset of the firm?
3. Prepare accounting entries relating to the ferry from January 1, 2016 to December 31, 2020.
4. List some of the estimates and judgments that the management of the firm would have made in accounting for the ferry.
Step by Step Answer:
Practical Finance For Operations And Supply Chain Management
ISBN: 9780262043595
1st Edition
Authors: Alejandro Serrano, Spyros D. Lekkakos, James B. Rice