QUESTION FOUR

$[25]$

On $1$ January $2011,$ Marine Limited took delivery of its newly constructed luxury ocean$-$liner $($African Queen II$)$ at a cost of R$5000$ million. Marine Limited has operated numerous luxury ocean$-$liners across the seven seas of the world for over fifty years and in order to maintain its reputation as the most elite of ocean$-$liners it replaces its ocean$-$liners every ten years even though the economic life of ocean$-$liners is proven to be approximately fifty years. The residual value of African Queen II was appropriately determined to be:

R$4000$ million on $31$ December $2016,2017$ and $2018$;

R$4850$ million on $31$ December $2019.$

On $31$ December $2020,$ because of declining demand for ocean$-$liner services resulting from the extended global economic downturn arising from world Covid $19$ Pandemic, Marine Limited decided that it would continue to use African Queen II for a further ten years $($ie a total useful life of $15$ years$).$

On $31$ December $2020,$ the fair value of an equivalent ocean$-$liner that is:

$5$ years old is R$3200$ million,

$10$ years old is R$3000$ million, and

$15$ years old is R$2000$ million.

If Marine Limited was to sell the African Queen II on $31$ December $2020,$ selling expenses of R$320$ million would be incurred.

At $31$ December $2020,$ Marine Limited appropriately estimated the expected future net operating cash flows of keeping the African Queen II in use to be an inflow of R$500$ million per annum and that the African Queen II will realise upon disposal R$2500$ million $($net of disposal costs$)$ ten years hence $($ie on the expected date of disposal$).$

An appropriate discount rate is $9\%$ per annum.

Required:

Discuss how Marine Limited should account for the African Queen II in its $31$ December $20\mathrm{.}5$ company financial statements. Your answer should be limited to the recognition and measurement issues only $($ie ignore presentation and disclosure$).$