Question

On May 22, 2018, for the purpose of transporting company officials to remote location, Oil & Gas Ltd. purchased a small airplane costing $120,000 and paid $20,000 for painting and lettering.

The company paid $25,000 in cash and signed a one-year notes payable for the balance.

The airplane is expected to have a useful life of 16 years or 1,500,000 kilometers, with a salvage value of $20,000.

Required

1. Calculate the cost of the airplane and prepare a journal entry

2. Compute depreciation expense for the year ended December 31, 2018, assuming the company uses the straight-line method of depreciation and prepare a journal entry
3. Compute depreciation expense for the year ended December 31, 2018, assuming the company uses the double-declining-balance method of depreciation and prepare a journal entry
4. Compute depreciation expense for the year ended December 31, 2018, assuming the company uses the units-of-production method of depreciation and that the airplane was flown 96,000 kilometers during the year and prepare a journal entry
5. During 2020, management has decided that, as a result of heavy usage, the total life of the airplane would only be 13 years instead of the original estimate of 16 years. The salvage value was expected to be $15,000 at the end of the airplane’s useful life. Revise the depreciation expense for the year ended December 31, 2020, assuming the company uses the straight-line method of depreciation, and prepare a journal entry

Answer 1

Ans a)

Cost of Airplane = $120,000 + $20,000

= $140,000

Date	Account Title & Explanation	Debit	Credit
22 May 2018	Airplane	$140,000
	Cash		$25,000
	Notes Payable		$115,000
	(To record purchase of airplane)

Ans b)

Depraciation under Straight Line Method = (Cost of Airplane - Salvage Value) / Estimated Life

= ($140,000 - $20,000) / 16

= $7,500

Date	Account Title & Explanation	Debit	Credit
31 Dec 2018	Depreciation Expense	$7,500
	Airplane		$7,500
	(To record depreciation on airplane)

Ans c)

Depreciation under double declining balance method = 2 * Rate under Straight line method

= 2 * (100 / 16)

= 12.5%

Depreciation = $140,000 * 12.5%

= $17,500

Date	Account Title & Explanation	Debit	Credit
31 Dec 2018	Depreciation Expense	$17,500
	Airplane		$17,500
	(To record depreciation on airplane)

Ans d)

Depreciation under Unit of Production Method = ($140,000 - $20,000) / 1,500,000 * 96,000

= $7,680

Date	Account Title & Explanation	Debit	Credit
31 Dec 2018	Depreciation Expense	$7,680
	Airplane		$7,680
	(To record depreciation on airplane)

Ans e)

Book Value of Airplane as on 01 Jan 2020 = Cost of Airplane - Depreciation for 2018 - Depreciation for 2019

= $140,000 - $7,500 - $7,500

= $125,000

Depreciation under Straight line method for 2020 = (Book value as on 01 Jan 2020 - Salvage Value) / Remaining Life

= ($125,000 - $15,000) / (13 - 2)

= $10,000

Date	Account Title & Explanation	Debit	Credit
31 Dec 2020	Depreciation Expense	$10,000
	Airplane		$10,000
	(To record depreciation on airplane)