AKB Air acquired a cargo plane. The company paid $3m cash and gave the supplier a note payable worth $500,000. The company paid additional cost of $6,000 to have the plane delivered in the Hong Kong Airport and $94,000 to have it equipped with special equipment. The company expects the cargo plane will last for at least 10 years; and estimates that it will be able to sell the plant at the end of 10 years for $900,000.
Required:
(a) Explain the accounting treatment for the cargo plane in accordance with HKAS 16 “Property, Plant and Equipment”. (Definition, Recognition, Initial measurement, Measurement after recognition) (Assume the company adopts cost model for all its property, plant and equipment).
(b) At the end of third year, the company decided to trade in the old plane for a new one. The trade-in transaction has commercial substance. The company paid $7m cash for the new plane and surrendered the old cargo plane. Immediately prior to the trade-in, the company had received offers from parties who were willing to buy the plane outright at $1.5m cash.
