Question

Please help. The requirements are the questions. Thanks
On January 1, 2017. Northeast USA Transportation Company purchased a used aircraft at a cost of $49,200,000. Northeast USA expects the plane to remain useful for five years (6,000,000 miles) and to have a residual value of $5,200,000. Northeast USA expects to fly the plane 775,000 miles the first year, 1,350,000 miles each year during the second, third, and fourth years, and 1,175,000 miles the last year. (Click the icon to view the first year depreciation amounts under each method.) Read the requirements. - X nature of the tax advantage. 0 Requirements use. the first year. can invest to earn more income. Assume Northeast USA is trying to decide which depreciation method to use for income tax purposes. The company can choose from among the following methods: (a) straight-line, (b) units-of-production, or (C) double-declining-balance methods. 1. Which depreciation method offers the highest tax advantage for the first year? Describe the nature of the tax advantage. 2. How much income tax will Northeast USA save for the first year of the airplane's use under the method you just selected as compared with using the straight-line depreciation method? The company's income tax rate is 38%. Ignore any earnings from investing the extra cash. the method you just selected as compared with using the straight-line ſing the extra cash. (Round the depreciation rates to two decimal places.

Answer 1

(a) Straight-Line Depreciation Schedule:

Depreciation per year = (Book value less salvage value) divided by expected life. Ensure at the end of expected life, asset value should be equal to salvage value.

Straight Line Depreciation
	Book Value	49,200,000
	Salvage Value	5,200,000
	Expected Life	5	years
Year	Depreciation Expense	Accumulated Depreciation	Asset value at the end of year
1/1/2017			49,200,000
12/31/2017	8,800,000	8,800,000	40,400,000
12/31/2018	8,800,000	17,600,000	31,600,000
12/31/2019	8,800,000	26,400,000	22,800,000
12/31/2020	8,800,000	35,200,000	14,000,000
12/31/2021	8,800,000	44,000,000	5,200,000

(b) Units of Production Method depreciation schedule:

Depreciation per year = (Book value less salvage value) divided by expected life of units multiply by estimate life of units per year

Unit of Production Depreciation
	Book Value	49,200,000
	Salvage Value	5,200,000
	Expected units	6,000,000	miles
Year	Estimated number of units per year	Depreciation Expense*	Accumulated Depreciation	Asset value at the end of year
1/1/2017				49,200,000
12/31/2017	775,000	5,683,333.33	5,683,333.33	43,516,666.67
12/31/2018	1,350,000	9,900,000.00	15,583,333.33	33,616,666.67
12/31/2019	1,350,000	9,900,000.00	25,483,333.33	23,716,666.67
12/31/2020	1,350,000	9,900,000.00	35,383,333.33	13,816,666.67
12/31/2021	1,175,000	8,616,666.67	44,000,000.00	5,200,000.00

* Rounded off to 2 decimal places

(c) Double- Declining Method depreciation schedule:

Depreciation per year = Book value less salvage value multiplied by (100% divided by estimated life) multiplied by 2

Double-Declining method of Depreciation
Book Value	49,200,000
Salvage Value	5,200,000
Expected Life	5	years	40%
Year	Depreciation Expense	Accumulated Depreciation	Asset value at the end of year
1/1/2017			49,200,000
12/31/2017	17,600,000	17,600,000	31,600,000
12/31/2018	17,600,000	35,200,000	14,000,000
12/31/2019*	8,800,000	44,000,000	5,200,000
12/31/2020	-	44,000,000	5,200,000
12/31/2021	-	44,000,000	5,200,000

* In the third year, depreciation has to be adjusted accordingly to equal with salvage value of the asset.

Answer to Question 1:

Based on above schedule, it looks like "double declining method" of depreciation provides highest tax advantage in Year 1. Because if expense is more, accordingly income/profit will be less on which tax is applicable.

Answer to Question 2:

Depreciation Expense as per Double Declining method - $ 17,600,000

Depreciation Expense as per Straight Line method - $ 8,800,000

Difference between above two = $ 8,800,000 or in other terms 50%

(i.e.) Expense looks more by 50% under double declining method as compared to Straight Line method, which means net income will be 50% less in double declining method as compared to straight line method. With the tax rate of 38%, tax will be more by 19% in Straight line method as compared to double declining method.