Question

1. ABC Aerospace Inc. adheres to IFRS and applies component accounting to its major long-lived asset categories. Accordingly, the following data pertain to the company's fleet of test aircraft as at December 31, 2013 (in millions $):

Category	Cost	Accumulated Depreciation	Net Book Value
Avionics	$100	$48	$52
Fuselage & Wings	$200	$120	$80
Aircraft Engines	$20	$16	$4

Additional information includes the following:

• The avionics have a salvage value $2 and a remaining useful life of ten years and are depreciated on a straight-line basis.
• Both the fuselage and wings and aircraft engines are depreciated at a declining rate of 25%.

Required:

1. On July 1st, 2014, the aircraft's engines were all disposed for $1.5 million. On that same date, new engines were purchased in the amount of $10 million with a useful life of 20 years and no salvage value. Determine the gain or loss on disposal of the old aircraft engines.

2. Assuming there were no acquisitions or disposals made, compute the depreciation expense for 2014 (in millions$). Round your answers to the nearest whole dollar.

Answer 1

a) net book value of aircraft engine as on 31st December ,2013 = $4

Depreciation expense = net book value * depreciation rate

= 4*25%*6/12

= 0.5

Book value as on 1st July= $ 4-$0.5

=$3.5

Gain /(loss) on sale of asset = sale value- book value on 1st July

=1.5-3.5

=(2)

Loss on sale of aircraft engine= $2

b) if disposal of aircraft engine is not there then depreciation expense for year 2014, will be

Avionics (depreciation expense) =( net book value - salvage value)/ useful life of asset

= (52-2)/10

= 5

Fuselage and wings = net book value * depreciation rate

= 80*25%

= 20

Aircraft engine = net book value * depreciation rate

= 4*25%

=1

Total depreciation expense for year 2014= avionics+ fuselage and wings+ Aircraft engine

= 5+20+1

= $26