End of semester comprehensive supplementary assessment

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Question 3

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Use this case study to answer Question 1 - 13

Nam Leisure is a private limited liability company that operates a single cruise ship. The ship was acquired on 1 October 2010. Details of the cost of the ships components and their estimated useful lives are:

Component Original cost Deprecation basis

($ million)

Ships fabric (hull, decks etc) 300 25 years straightline

Cabins and entertainment area fittings 150 12 years straightline

Propulsion system 100 Useful life of 40,000 hours

At 30 September 2018 no further capital expenditure had been incurred on the ship.

In the year ended 30 September 2018 the ship had experienced a high level of engine trouble which had cost the company considerable lost revenue and compensation costs. The measured expired life of the propulsion system at 30 September 2018 was 30,000 hours. Due to the unreliability of the engines, a decision was taken in early October 2018 to replace the whole of the propulsion system at a cost of $140 million. The expected life of the new propulsion system was 50,000 hours and, in the year, ended 30 September 2019 the ship had used its engines for 5,000 hours.

At the same time as the propulsion system replacement, the company took the opportunity to do a limited upgrade to the cabin and entertainment facilities at a cost of $60 million and repaint the ships fabric at a cost of $20 million. After the upgrade of the cabin and entertainment area fittings it was estimated that their remaining 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 2018. All residual values can be taken as nil.

Question: The cost of the limited upgrade to the cabin and entertainment facilities to be capitalised is