Reference no: EM132622342

Question - Red Falcon Ltd. owns and operates an airplane that transports passengers between Nairobi and Dar es Salaam. The airplane service is the main business of the entity. On 1 January 2011, the entity purchases a new airplane for Ksh 1,000,000 cash. The airplane comprises two main components-the fuselage (allocated cost Ksh 800,000 and an estimated remaining useful life of 20 years with no residual value) and the engine (allocated cost Ksh 200,000 and an estimated remaining useful life of 10 years with no residual value). The entity depreciates the airplane using the straight-line method. On 31 December 2014, a storm severely damages the engine. Consequently, the entity scraps the engine. On 1 January 2015, the entity replaces the engine at a cost of Ksh 300,000. The new engine is expected to propel the airplane for the remaining estimated useful life of the airplane, after which the airplane and the engine will be scrapped. On 31 December 2015, in response to an unsolicited offer, the entity disposes of the airplane for Ksh 910,000.

Required -

a. What information about that entity's airplane would a potential investor find useful? Why do you think that information would be useful?

b. Describe how the airplane satisfies the definition of property, plant, and equipment.

c. Prepare journal entries relating to the airplane in the accounting records of the entity from 1 January 2011 to 31 December 2015.