Calculation of depreciation   LO5 On 1 July 2019, Eagle Airlines acquired a new aeroplane for a total cost of $10 million. A breakdown of the costs to build the aeroplane was given by the manufacturers. Aircraft body $3 000 000 Engines (2) 4 000 000 Fitting out of aircraft: Seats 1 000 000 Carpets 50 000 Electrical equipment: Passenger seats 200 000 Cockpit 1 500 000 Food preparation equipment 250 000 All costs include installation and labour costs associated with the relevant part. It is expected that the aeroplane will be kept for 10 years and then sold. The main value of the plane at that stage is the body and the engines. The expected selling price is $2.1 million, with the body and engines retaining proportionate value. Costs in relation to the aircraft over the next 10 years are expected to be as follows.

(a) Aircraft body. This requires an inspection every 2 years for cracks and wear and tear, at a cost of $10 000.

(b) Engines. Each engine has an expected life of 4 years before being sold for scrap. It is expected that the engines will be replaced in 2023 for $4.5 million and again in 2027 for $6 million. These engines are expected to incur annual maintenance costs of $300 000. The manufacturer has informed Eagle Airlines that a new prototype engine with an extra 10% capacity should be on the market in 2025, and that existing engines could be upgraded at a cost of $1 million.

(c) Fittings. Seats are replaced every 3 years. Expected replacement costs are $1.2 million in 2022 and $1.5 million in 2028. The repair of torn seats and faulty mechanisms is expected to cost $100 000 p.a. Carpets are replaced every 5 years. They will be replaced in 2025 at an expected cost of $65 000, but will not be replaced again before the aircraft is sold in 2029. Cleaning costs amount to $10 000 p.a. The electrical equipment (such as the TV) for each seat has an annual repair cost of $15 000. It is expected that, with the improvements in technology, the equipment will be totally replaced in 2025 by substantially better equipment at a cost of $350 000. The electrical equipment in the cockpit is tested frequently at an expected annual cost of $250 000. Major upgrades to the equipment are expected every 2 years at expected costs of $250 000 (in 2018), $300 000 (in 2020), $345 000 (in 2022) and $410 000 (in 2027). The upgrades will take into effect the expected changes in technology.

(d) Food preparation equipment. This incurs annual costs for repair and maintenance of $20 000. The equipment is expected to be totally replaced in 2025. Required 1. Discuss how the costs relating to the aircraft should be accounted for with respect to the following.

(a) Aircraft body

(b) Engines

(c) Fittings

(d) Food preparation equipment 2. Determine the expenses recognised for the 2019–20 financial year.