Presented below are three independent situations.
1. Bruegger Transportation purchased a ship on January 1, 2019, for £20,000,000. The useful life of the ship is 40 years, but it is subject to a government-mandated major overhaul every 4 years with a total projected cost of £4,000,000. The present value related to these payments is £3,200,000. Explain how this transaction should be accounted for at January 1, 2019, and at December 31, 2019. Prepare the journal entries to record all appropriate entries related to the ship in 2019. Bruegger uses the straight-line method of depreciation and assumes no residual value for the ship.
2. Marquardt Company signs a 5-year lease related to office space at an annual rental of £30,000. At the end of the second year, the company decides to close its operation in this part of country. Its lease is non-cancelable, and the penalty for non-payment is £62,000. The present value of future payments on the lease is estimated to be £81,000. The company does not believe that it can sublet these facilities. Explain how this transaction should be accounted for at December 31, 2019. Prepare the journal entry to record this entry on December 31, 2019.
3. Powersurge Group operates a nuclear power plant. The plant cost £40,000,000 on January 2, 2020. It is estimated that the present value of dismantling the plant and the ensuing clean-up will be £1,000,000. Explain how this transaction should be accounted for on January 2, 2020. Prepare the journal entry to record this transaction on January 2, 2020.
Instructions
Prepare the explanation and journal entry required for each situation.