Question

Sightseeing Bus Ltd

Peter formed Sightseeing Bus Ltd (SBL) on 1 January 2011. SBL offered hop on and hop off bus services to tourists in Hong Kong. Tourists paid $50 and could travel on the SBL buses the whole day.

Double decker

On the day SBL was formed, SBL bought a second hand double decker (60 seats) for $210,000 and spent $40,000 on replacing all the seats. Peter projected that by 31 December 2015, he would replace it with a better bus. This double decker and the seats had an estimated useful life of 10 years. Peter estimated that the residual of the double decker, based on the prices prevailing at the date of acquisition would be $100,000 at 31 December 2015 and $20,000 at the end of its useful life. Realization costs were estimated at 5% of the residual value. SBL’s accounting policy was to use the cost model for its double decker and to use straight line method for depreciation.

On 31 December 2015, SBL exchanged the double decker with a second hand ferry (120 seats) and started its harbor sightseeing route in Victoria Harbour. Passengers had to pay $5 per hour for the ferry service. The fair value of the ferry on the date of exchange was $90,000.

With reference to the double decker, answer the following questions.

1. (a) Determine the depreciation charges for the year ended 31 December 2011 and explain the basis of your calculation.

2. (b) Does the exchange transaction (exchange double decker for ferry) have commercial substance? Explain.

3. (c) Prepare accounting journal entries to record the exchange transaction on 31 December 2015. Show your workings.

4. (d) Suppose the exchange transaction did not take place and SBL was using the revaluation model for the double decker, identify two additional disclosures for the double decker that SBL needed to provide in its 2015 financial statements under HKAS 16 Property, Plant and Equipment.

Answer 1

Sub Question (a)

Depreciation for the year ending 31 december 2011 would be calculated as follows:

Purchase cost of double decker - $ 2,10,000

Add: Replacement Cost - $ 40,000

Total Cost   - $ 2,50,000

Less: Residual Value at the end of 10 years - $ 20,000

Depreciable Value - $ 2,30,0000

Depreciation For the Year ending 2011 - $ 2,30,000/10 years = $ 23,000 per Year

Sub Question (b)

Yes, The exchange transaction have a commercial nature,because the exchange of an asset for another one occurs in the normal course of business,and also there occurs a loss in the exchange transaction which needs to be accounted.

The Calculation would be as followS:

Cost of the assets - $ 2,50,000

Less: Residual value at the end of 5th year - $ 1,00,000

Depreciable amount - $ 1,50,000

Loss on exchange of decker for ferry = $ 1,00,000 - $ 90,000 = $10,000

Sub Question (c)

Date	Particulars		Debit	Credit
			Amount	Amount
31-12-2015	Depreciation A/c	Dr	35,000
	To Depreiation Reserve			35,000
	(Being Depreciation reworked charged to asset)
31-12-2015	Ferry A/c	Dr	90,000
	Loss on Exchange A/c	Dr	10,000
	To Double Decker A/c			100,000
	(being doube decker exchanged for ferry now accounted)

Sub Question (d)

If the Exchange transaction doesnt take place and the value of double decker is shown at Revalued figures , the following two additional disclosures shall be made in the financial statements:

• the carrying amount of double decker,if the asset had been carried under cost model
• the surplus amount acquired on revalation.