Question

On January 1, 2018, Northeast Airlines purchased a used airplane for $37,500,000. Northeast Airlines expects the plane to remain useful for four years (4,000,000 miles) and to have a residual value of $5,500,000. The company expects the plane to be flown 1,300,000 miles the first year. Read the requirements. Requirement 1a. Compute Northeast Airlines's first-year depreciation expense on the plane using the straight-line method. Begin by selecting the formula to calculate the company's first-year depreciation expense on the plane using the straight-line method. Then enter the amounts and calculate the depreciation for the first year. Requirements = Straight-line depreciation Requirement 1b. Compute Northeast Airlines's first-year depreciation expense on the plane using the units-of-production method. Before calculating the first-year depreciation expense on the plane using the units of production method, calculate the depreciation expense per unit. Select the formula, then enter the amounts and calculate the depreciation per unit. 1. Compute Northeast Airlines's first-year depreciation expense on the plane using the following methods: a. Straight-line b. Units-of-production c. Double-declining-balance 2. Show the airplane's book value at the end of the first year for all three methods. ( = Depreciation per unit Now select the formula, enter the amounts, and calculate the company's first-year depreciation expense on the plane using the units-of-production method. Print Done] = Units-of-production depreciation Requirement 10. Compute Northeast Airlines's first-year depreciation expense on the plane using the double-declining-balance method. Begin by selecting the formula to calculate the company's first-year depreciation expense on the plane using the double-declining-balance method. Then enter the amounts and calculate the depreciation expense for the first year. (Enter "O" for items with a zero value.) Double-declining = balance depreciation Requirement 2. Show the airplane's book value at the end of the first year for all three methods. Straight-Line Units-of-production Double-declining-balance Cost Less: Accumulated Depreciation Book Value

Answer 1

Northeast Airline

Cost = $ 37,500,000

Residual value = $ 5,500,000

Useful life = 4 years

Life = 40,00,000 miles

1st year = 13,00,000 miles

1a) Depreciation under straight line method:

Depreciation = (cost - residual value) / useful life

= (37,500,000-5,500,000)/4

= 32,000,000/4 = $ 80,00,000

1b) Depreciation under units of production method:

Depreciation per mile = (cost - residual value)/ total miles

= (37,500,000-5,500,000)/40,00,000

= 32,000,000/40,00,000 = 8 per mile

Depreciation for 1st year = Depreciation per mile × no of miles in 1 St year

= 8 × 13,00,000 miles = $ 10,400,000

1c) Depreciation rate under straight line method = Depreciation / Depreciable cost

= 80,00,000/32,000,000 = 25%

Depreciation rate under double declining method = 2 × rate under straight line method

= 2 × 25% = 50%

Depreciation for 1 St year = Depreciable cost × rate under double declining method

= 32,000,000 × 50% = $ 16,000,000

2. All three methods. the Book value at end of 1st year:

	Straight line method ($)	Units of production ($)	Double declining method ($)
Cost	37,500,000	37,500,000	37,500,000
Less: Accumulated depreciation	(80,00,000)	(10,400,000)	(16,000,000)
Book value	29,500,000	27,100,000	21,500,000