Question

Assume that at the beginning of 2015 Fast Delivery purchased a used Jumbo 747 aircraft at a cost of $55,200,000. Fast Delivery expects the plane to remain useful for five years ​(6,800,000 ​miles) and to have a residual value of $5,200,000. Fast Delivery expects to fly the plane 835,000 miles the first​ year, 1,225,000 miles each year during the​ second, third, and fourth​ years, and 2,290,000 miles the last year.

1. Compute Fast Delivery​'s depreciation for the first two years on the plane using the following​ methods:

a. ​Straight-line method

b. ​Units-of-production method​ (round depreciation per mile to the closest​ cent)

c. ​Double-declining-balance method

2. Show the​ airplane's book value at the end of the first year under each depreciation method.

Answers:

A. Using the straight-line method, depreciation is $_________ for 2015 and $__________ for 2016.

B. Using the units-of-production method, depreciation is $__________ for 2015 and $__________ for 2016

C. Using the doubling-decling-balance method, depreciation is $_________ for 2015 and $________ for 2016

2.  

Book Value:	Straight-Line	Units-of-Production	Double-Declining-Balance
Less:	____________	_______________	_______________________
Book Value	=============	===============	================

Answer 1

ans)

Straight line method

Depreciation = cost - salvage value / Estimated useful life

Depreciation for 2015 = 55,200,000 - 5,200,000 / 5

= 10,000,000

Depreciation for 2016 = 10,000,000

b)Units of production method

Depreciation = cost - salvage value / estimated number of units

= 55,200,000 - 5,200,000 / 6,800,000 miles

= 7.35 per mile

Depreciation for 2015 = 835000 X 7.35 per mile = 6,137,250

Depreciation for 2016 = 1225000 X 7.35 per mile = 9,003,750

C) Double declining balance method

Straight line depreciation rate = 1 / useful life of the asset

= 1 / 5

= 20%

Double decling balance rate = 20% X 2 = 40%

Depreciation for 2015 = 55200000 X 40% = 22,080,000

Depreciation for 2016 = (55200000 - 22080000) X 40% = 13,248,000

2) Book value at the end of first year under each depreciation method

Straight line method Units of production Double decling Balance

Book value 55,200,000 55,200,000 55,200,000

Less: Depreciation (10,000,000) (6,137,250) (22,080,000)

Book value at the end of 2015 45,200,000 49,062,750 33,120,000