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Question: sightseeing bus ltd peter formed sightseeing bus ltd sbl on...

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Sightseeing Bus Ltd

Peter formed Sightseeing Bus Ltd (SBL) on 1 January 2011. SBL offered hop on and hop off bus services to tourists in Hong Kong. Tourists paid $50 and could travel on the SBL buses the whole day.

Double decker

On the day SBL was formed, SBL bought a second hand double decker (60 seats) for $210,000 and spent $40,000 on replacing all the seats. Peter projected that by 31 December 2015, he would replace it with a better bus. This double decker and the seats had an estimated useful life of 10 years. Peter estimated that the residual of the double decker, based on the prices prevailing at the date of acquisition would be $100,000 at 31 December 2015 and $20,000 at the end of its useful life. Realization costs were estimated at 5% of the residual value. SBL’s accounting policy was to use the cost model for its double decker and to use straight line method for depreciation.

On 31 December 2015, SBL exchanged the double decker with a second hand ferry (120 seats) and started its harbor sightseeing route in Victoria Harbour. Passengers had to pay $5 per hour for the ferry service. The fair value of the ferry on the date of exchange was $90,000.

With reference to the double decker, answer the following questions.

  1. (a) Determine the depreciation charges for the year ended 31 December 2011 and explain the basis of your calculation.

  2. (b) Does the exchange transaction (exchange double decker for ferry) have commercial substance? Explain.

  3. (c) Prepare accounting journal entries to record the exchange transaction on 31 December 2015. Show your workings.

4. (d) Suppose the exchange transaction did not take place and SBL was using the revaluation model for the double decker, identify two additional disclosures for the double decker that SBL needed to provide in its 2015 financial statements under HKAS 16 Property, Plant and Equipment.

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