5. Managers make estimates of asset lives, salvage values and the method of allocation (i.e.

straig
Hence, management has considerable amount of discretion over the depreciation expense.

Asumsi kedua perusahaan memiliki Jenis yg sama dan terdapat dalam soal use Q to analyze data

Q Airways
2007 2008
Aircraft and Engines
Cost 15626.2 9769.7
Accumulated Depreciation -6484.7 -5546.5
Foreign currency adjustment
Net book value $9,141.50 $4,223.20

Spares
Cost 748 703.5
Accumulated Depreciation -345.5 -309.1
Net book value $402.50 $394.40

Depreciation expense
Aircraft and Engines 1091.1 991.5
Spares 51.5 51.2

Profit for Year $719.60 $480.00

ANALYSTS' ADJUSTMENTS

(1) Depreciation expense

Using Q faster rate of 6.98% applied to N: difference is 61.73

(2) Depreciation backlog (Tracing Back to adjust the faster depreciation rate)
Past rate of depreciation = 1525 accumulated deprec/207deprec =
Backlog is 7.3671*(268.73-207) = 454.39453 So new accumulated depreciation is

Current Adjusted

Cost 3850 3850

Accumulated Depreciation 1525 1979.4
Foreign currency adjustment 148 148
Net book value $2,473.00 $2,018.60
Net Income

Summary new depreciation per annum is $268.73

new accumulated depreciation is $1979.4
 method of allocation (i.e. straight line or diminishing value).
the depreciation expense.

alam soal use Q to analyze data N

N Airways
2007 2008

3850 3383
-1525 -1363
148 251
$2,473.00 $2,271.00

255 244
-91 -84
$164.00 $160.00

207 182
11 13

$214.00 $96.00

ation rate)
 7.3671497585 years
cumulated depreciation is

Adjusted

add 454.39

subtract 454.39
subtract 268.73-207 = 61.73 to reflect the higher rate of depreciation
DEPRECIATION TO COST RATIO
Q Airways N Airways
2007 2008 2007 2008

6.98% 10.15% Vs 5.38% 5.38%

6.89% 7.28% Vs 4.31% 5.33%

Apply Q Rate 6.98% to N:

6.98% of 3850 = $268.73
Minus reported = $61.73 difference

Materiality? 61.73/214 profit = 28.85%

A test of whether depreciation policy is accurate?

- does the company make regular gains/losses on disposal of aircraft?
1979.4 =1525+454.39
 of profit reported by N

n disposal of aircraft?
An airline company, Q Airways , provides the following information on its finance and operating lea

Q Airways leases aircraft and plant and equipment under finance leases with expiry dates between

Most finance leases contain purchase options exercisable at the end of the lease term.

The Q has the right to negotiate extensions on most leases. The Q leases aircraft, building and plan
one and 35 years. The Q Group has the right to negotiate extensions on most leases.

FOOTNOTE DISCLOSURES FOR FINANCE AND OPERATING LEASES IN 2007 ANNUAL REPORT

$Million

Not later than one year

Later than one but not later than five years
Later than five years

Less finance charges

What interest rate does Q use to capitalise its finance leases?

Use this rate to capitalise the non-cancellable operating leases. Note any assumptions you make. Sh
just the non-cancellable operating leases?
The lease schedule of lease payments can be allocated to specific years on the following basis:

Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10

Present value
Interest rate

Capitalisation of non-cancellable operating leases

YEAR

1
2
3
4
5
6
7
8
CURRENT ASSETS/LIABILITIES
NON-CURRENT ASSETS/LIABILITIES
and operating leases:

iry dates between one and 17 years.

term.

, building and plant and equipment under operating leases with expiry dates between
ses.

AL REPORT

Total operating
lease & rental Non-cancellable
Finance Lease commitments operating leases

$458.2 $568.4 $391.0

375.4 1677.9 1278.0
400.8 1085.8 653.1
$1,234.40 $3,332.10 $2,322.10

175.9
$1,058.5

tions you make. Should the analyst capitalise the total operating lease and rental commitments or
ollowing basis:
Working
458.2 375.4/4 = 93.9
93.9 400.8/93.9 = 4.2706446457 which is 4 payments of 93.85 and one payment o
93.9
93.9
93.9
93.9
93.9
93.9
93.9
25
$1,234.40

$1,058.04 NPV(0.042, 458.2,93.9,93.9,93.9,93.9,93.9,93.9,93.9See finance text

4.20% 1,058.04 = (458.2/1+x)+(93.9/(1+x)2 etc See finance text (Finding rate)

CASHFLOW RATE PRESENT VALUE

Working
391.0 = 4.2% 375.2 1287.0/4 =
321.8 296.3 653.1/321.75 =
321.8 284.4
321.8 272.9
321.8 261.9
321.8 251.4
321.8 241.3
9.6 6.9
$2,331.20 $1,990.41
INCREASE BY $375.20
INCREASE BY $1,615.20
$1,990.40
mmitments or
3.85 and one payment of 25.00

(Finding rate)

321.8
2.0298
d one payment of 25.00

The rate of return that equates the present value with the cash flows is 4.2%, which is the interest r

which is 2 payments of 321.75 and one payment of 9.6

25.4

9.6001
 4.2%

1 2 3 4 5 6 7 8 9 10
458.2 93.9 93.9 93.9 93.9 93.9 93.9 93.9 93.9 25
439.731 86.483 82.997 79.652 76.441 73.36 70.403 67.565 64.842 16.568

477.444 101.95 106.24 110.7 115.35 120.19 125.24 130.5 135.98 37.724
 1058

1461.3
XYZ Co issues 1 million convertible bonds of $1 each carrying nominal interest of 10%. Bondholde
$1 ordinary shares of the company on the date of their maturity in three years time instead of recei

Interest rate of a similar bond without the conversion option is 15%.

How must XYZ Co account for the convertible bonds upon initial recognition, subsequent measure
converted after three years?

CB
1,000,000 Cash/Bank

Nominal interest
10%
Similar bond without conversion interest 15%
Maturity 3 years

Present value of future interest payments and principal using 15%:

1 2 3 3
Nominal 100,000 100,000 100,000 1,000,000
Discount factor 15% 1.15 1.3225 1.520875 1.520875
PV 86,956.52 75,614.37 65,751.62 657,516.23
Total 885,838.74

Recognition
Cash/Bank 1,000,000
Liability-CB 885,838.74
Equity-Share Options 114,161.26

Subsequent Measurement
Interest expense will be charged using 15%.
The difference between interest paid and interest charged will be added to the liability
Interest expense liabilites
Year 1 ### =15%*885,838.74 918,714.56 =885,838.74+132,875.81-100,0
Year 2 ### =15%*918,714.56 956,521.74 =918,714.56+137,807.18-100,0
Year 3 ### ###

Maturity-CB convert into Shares after 3 Years

Liability-CB ###
Equity-Share Options 114,161.26
Share Capital ###
Share Premium 114,161.26
erest of 10%. Bondholders are entitled to convert their bonds into
ars time instead of receiving principle repayment.

n, subsequent measurement and maturity assuming all bonds are

Firstly, as convertible bonds usually carried lower intere

conversion option, the true opportunity cost of financi
1,000,000

Secondly, the financial position of the entity did not presen

Liabilities-CB 1,000,000 share options as part of the convertib

=885,838.74+132,875.81-100,000
=918,714.56+137,807.18-100,000
y carried lower interest rate than ordinary debt because of the
ortunity cost of financing the debt was not being recognized

e entity did not present the fact that the entity had in effect issued
as part of the convertible debt arrangement.