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) 3.Calculate the recoverable amount of the asset at the 31 March 2020 financial year end.(2 marks)

Answer 1

Answer:N$ 363 MILLION

Explanation:

EXPECTED SELLING PRICE           450 M

COST OF DISPOSAL (20 M +8 M+59 M)   87 M

FAIR VALUE = N$ 363 m