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The economic life of Kayte’s vessels is estimated to be 30 years, but the useful life of some of the vessels is only 10 years because Kayte's policy is to sell these vessels when they are 10 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 amount. Broker valuations of the residual value were considerably higher than those used by Kayte.
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 10 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. Normally, engines last for the 30-year total life if overhauled every 10 years. Additionally, one type of vessel was having its funnels replaced after 15 years, but the funnels had not been depreciated separately. 

Requirements:

Discuss the accounting treatment of the above transactions in the financial statements of Kayte.
Marks: 12

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Created by Ref Marking Action
Kawsar Ahmed's picture
Kawsar Ahmed
03/28/2021 - 17:39

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