Question

57-4 3) Assume that at the beginning of 2015 QuickAir purchased a used Jumbo 747 aircraft at a cost of $56,700,000. QuickAir expects the plant to remain useful for five years (5,000,000 miles) and to have a residual value of $4,700,000. QuickAir expects to fly the plane 775,000 miles the first year, 1,200,000 miles each year during the second, third, and fourth years, and 625,000 miles the last year. Required Compute QuickAir's depreciation for the first two years on the plane using the following I. methods: a. Straight-Line Method b. Units-Of-Production Method (round depreciation per mile to the closest cent) c. Double-Declining-Balance Method Show the airplane's book value at the end of the first year under each depreciation 1I. method.

Answer 1

Requirement 1(a) Computation of Depreciation under Staright line method: Cost Less : Salvage Value Depreciable value (A) Asset life (B) Annual Straight line depreciation value (A/B) 56,700,000.00 (4,700,000.00) 52,000,000.00 5 years 10,400,000 $ Depreciation for year 1 Depreciation for year 2 Depreciation for year 3 Depreciation for year 4 Depreciation for year 5 10,400,000 10,400,000 10,400,000 10,400,000 10,400,000 Note : Depreciation for every year will be same under straight line method

Requirement 1(b) Cost Less : Salvage Value Depreciable value (A) $ $ 56,700,000.00 (4,700,000.00) 52,000,000.00 No of Mails the machine to be used (B) Depreciation per Mile (A/B) 5000000 Miles 10.40 Depreciation for year 1 Depreciation for year 2 Depreciation for year 3 Depreciation for year 4 Depreciation for year 5 No of Miles Driven Depreciation per Mile (A/B) Depreciation cost 775000.00 $ 10.40 $ 8,060,000.00 1200000.00 $ 10.40 $ 12,480,000.00 1200000.00 $ 10.40 $ 12,480,000.00 1200000.00 $ 10.40 $ 12,480,000.00 625000.00 $ 10.40 $ 6,500,000.00

Requirement 1(C) Computation of Depreciation under Double Declining Balance method : Cost $ 56,700,000.00 Less : Salvage Value $ (4,700,000.00) Depreciable value (A) $ 52,000,000.00 20.00% Annual Staright line depreciation rate = 10400000/52000000 Double Declining factor Double Declining Annual rate 200% 40.00% Year Beginning Balance 1 $ 56,700,000.00 2 $ 34,020,000.00 3 $ 20,412,000.00 12,247,200.00 5 $ 7,348,320.00 Double Declining Annual rate Annual depreciation amount Ending Balance 40.00% 22,680,000 $ 34,020,000 40.00% 13,608,000 $ 20,412,000 40.00% 8,164,800 $ 12,247,200 40.00% $ 4,898,880 $ 7,348,320 40.00% 2,648,320 $ 4,700,000 (residual Value) Note : Since in the Last year salvage value is $4700000 Depreciation expense will be $7348320-4700000 = $2648320

Requirement 2 Cost Less : Depreciation for year 1 Book value at end of year 1 Staright Line Method Units of production method Doble declining balance method 56,700,000.00 $ 56,700,000.00 $ 56,700,000.00 (10,400,000) $ (8,060,000.00) $ (22,680,000) 46,300,000.00 $ 48,640,000.00 $ 34,020,000.00 A