Question

on jan 1st 2017, Ship X transportation company purchased a used aircraft at the cost of 54,000,000. shipex expects seaplane plane to remain useful for five years (7,300,000 milees) and to have a residual value of 4,000,000. shipex expects to fly the plane 875,000 miles the first year, 1,650,000 each year during the second, third and fourth and 1,475,000 the last year. compute shipex's depriciation for the first two years using the straight line method, the units of production method and the double declining balance method.

Answer 1

Straight Line Method

Straight line depreciation = (Cost - Salvage Value)/ Useful Life

=(54,000,000-4,000,000)/5

=10,000,000 each year

This amount shall be same for the second year, since it is straight line method

Book Value after Year1 = Cost - Year 1 Depreciation

=54,000,000-10,000,000

=44,000,000

Units of production method

= ( Cost - Salvage value) *Actual activity/ Estimated total activity

Year 1

= ( 54,000,000 - 4,000,000) *875, 000/7, 300,000

= 5,993,150.68

Book value after year 1

= 54,000,000 - 5,993,150.68

= 48,006,849.32

Year 2

= ( 54,000,000 - 4,000,000) *1, 650,000/7, 300,000

= 11,301,369.86

Double declining method

Depreciation rate = 1/5 = 20%

Double declining depreciation rate = 2*20% = 40%

Depreciation = Cost*Double declining depreciation rate

Year 1 depreciation

= 54,000,000*40%

= 21,600,000

Book value after year 1

= 54,000,000 - 21,600,000

= 32, 400,000

Year 2

= 32,4000,000*40%

= 12, 960,000

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