Elite Leisure Co is a private limited liability company that operates a single cruise ship. The ship was acquired on 1 October 20W6 (ten years before 20X6). Details of the cost of the ship’s components and the basis on which they are depreciated is as follows:
Component | Original cost | Depreciation basis |
$m | ||
Ship’s fabric (hull, decks etc) | 300 | 25 years straight-line |
Cabins and entertainment area fittings | 150 | 12 years straight-line |
Propulsion system | 100 | Useful life of 40,000 hours |
At 30 September 20X4 no further capital expenditure had been incurred on the ship.
The propulsion system has been used for 30,000 hours at 30 September 20X4. Due to the unreliability of the engines, a decision was taken in early October 20X4 to replace the whole of the propulsion system at a cost of $140 million. The useful life of the new propulsion system was 50,000 hours and, in the year, ended 30 September 20X5 the ship had used the system for 5,000 hours.
At the same time as the propulsion system replacement, Elite Leisure Co took the opportunity to do a limited upgrade to the facilities at a cost of $60 million and repaint the ship’s fabric at a cost of $20 million. After the upgrade of the facilities, it was estimated that their remaining useful life was five years (from the date of the upgrade). For the purpose of calculating depreciation, all the work on the ship can be assumed to have been completed on 1 October 20X4. All residual values can be taken as nil.
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