Question

You are the financial reporting consultant of Fly4000 a large company in the airline and travel
business whose principal market base is in Windhoek and the Wavis Bay. Its principal hub is
Windhoek local airport and Fly4000 has a small holiday business through its partnership with
a number of independent tour operators. It has a good reputation as a business carrier within
its SADC market, earned through very high standards of punctuality and service. Following
the recent COVID-19 global health pandemic that has resulted in boarder closure and
consequently flights cancellations with near zero operations. The interim financial accountant
of Fly4000 who had just completed a degree in Accounting has approached in the event of
the recent happening of a possible impairment of the company’s asset and requested you to
assist with the measurement of the assets.
Fly4000 owns an airplane that it uses for its regional travels with a remaining useful life of five
years with a carrying amount N$430m. Fly400 has is faced with the option of either having to
immediately dispose of the airplane or to continue to use. This asset is expected to be sold for
N$450 but not before legal cost of N $20m and another N$8m to get the plane ready for sale.
You were also informed that the sum of N$3m will be paid as airport charges on the plane for
the periods it’s been parked for and out of use.
Should Fly4000 continues to fly the plane, it is expected that this asset will generate cash
inflows of N$50m, N$70m, N$120m, N$100m, N$90m per annum over the remainder of its
useful life. The cash outflows necessary to generate these inflows amount to N$5m per
annum, which include routine maintenance costs of N$1m per annum. Fly4000, however,
intends to upgrade the asset after two years at a cost of N$12m. It is expected that this would
increase the annual cash inflows N$6m per annum and increase the remaining useful life to
seven years.
The asset depreciation over the remaining life is N$80m per annum and this is expected to
increase by N$4M due to the proposed alteration. The plane will be disposed for N$30m at
the end of the five years useful life. Fly4000 is projected to incur general overhead of N$1m
per annum. The application pre-tax discount rate is 15%.
Required:
1. Calculate the asset's fair value less cost of disposal at the 31 March 2020 financial
year end. (5 marks)
2. Calculate the asset's value in use at the 31 March 2020 financial year end, and state
briefly as to why each of the items included in Fly4000 five-year remaining projections
were either included or excluded from this calculation. (14 marks)

Answer 1

Answer:

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