On April 30, 2020, Oceanarium Corporation ordered a new passenger ship, which was delivered to the designated cruise port and available for use as of June 30, 2020. Overall, the cost of the ship was $97 million, with an estimated useful life of 12 years and residual value of $30 million. Oceanarium expects that the new ship, as a whole, will provide its greatest economic benefits in its early years of operation. After further research and discussion with management, it is determined that the ship consists of major parts with differing useful lives, residual values, and patterns of providing economic benefits:

The ship?s first voyage took place on August 1, 2020. The ship sailed a total of 328,000 nautical miles in 2020. Oceanarium prepares financial statements in accordance with IFRS.

Instructions

a. Identify the factors to consider in determining how to account for the purchase and depreciation of the ship.

b. Prepare the journal entry to record the purchase of the ship, assuming that Oceanarium paid cash for the purchase.

c. Prepare the journal entry(ies) to record depreciation expense for 2020. Do not round intermediate calculations where the units of production method is used but round final amounts to the nearest dollar in all methods.

d. Digging Deeper Explain any differences in part (a) if Oceanarium prepares financial statements in accordance with ASPE instead of IFRS.

e. Oceanarium Corporation?s banker has requested financial statements prepared under IFRS to determine Oceanarium?s ability to repay a long-term loan granted in 2019. What is the benefit to the banker of having each component of the ship depreciated separately?

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Pattern of Total output (nautical miles) 7.0 million Residual value Cost Useful life Part benefits Varies with activity 8 years Engines (6) $975,000 per engine $120,000 per engine 10 years Highest in early 7.8 million Hull $3,350,000 $502,000 years 15 years $15.5 million Evenly over life of body $87.8 million 12.6 million Body