Question

that at the beginning of 2017​, Porter Airlines purchased a Bombardier Q400 aircraft at a cost of $ 25,000,000. Porter expects the plane to remain useful for five years left parenthesis 5000000 km right parenthesis and to have a residual value of ​$5000000. Porter expects the plane to be flown 750,000 km the first​ year,  1250,000 km each year during years 2 through​ 4, and 500000 km the last year. 1.  Compute Porter​'s ​first-year depreciation on the plane using the following​ methods: a.   ​Straight-line b.   ​Units-of-production c.   ​Double-diminishing-balance 2.  Show the​ airplane's carrying amount at the end of the first year under each depreciation method.  

Answer 1

1.

a.Calculation of Depreciation using Straight line method :

Depreciation Expense = ( Purchase Cost - Estimated Salvage Value ) / Estimated Useful life

= ( $ 25,000,000 - $ 50,00,000 ) / 5 years

= $ 40,00,000 per year

Straight line depreciation expenses per annum is same over the useful of life of asset.

Thus, Depreciation expense for first year is $ 40,00,000

b. Calculation of Depreciation using units of activity method :

Depreciation rate = ( Purchase Cost - Estimated Salvage Value ) / Total Estimated km capacity

= ( $ 25,000,000 - $ 50,00,000 ) / 50,00,000 km

= $ 4 per Km

Porter expects the plane to be flown 750,000 km the first​ year

Thus,

Depreciation expense for fisrt year = Expected flown in First year * Depreciation rate per Km

= 750,000 * $ 4

= $ 30,00,000

c. Calculation of Depreciation expense for first year using Double-diminishing balance method :

Depreciation Expense fpr first year = Cost of Asset * Depreciation rate

= $ 25,000,000 * 40%

= $ 10,000,000

Working Note:

Calculation of Rate of Depreciation under Double declining balance method is as follows:

Rate of Depreciation under Double declining balance method = 2 * Depreciation rate

= 2 * 20

= 40%

Thus, Rate of Depreciation under Double diminishing balance method is 40%

Depreciation Rate = (1 / Estimated Useful life) * 100

= ( 1/ 5 ) * 100

= 20 %

2.

a. Straight line method

Carrying amount at the end of first year = Cost of asset - Depreciation expense

= $ 25,000,000 - $ 4000,000

= $ 21,000,000

b.units of activity method

Carrying amount at the end of first year = Cost of asset - Depreciation expense

= $ 25,000,000 - $ 3000,000

= $ 22,000,000

c.Double-diminishing balance method

Carrying amount at the end of first year = Cost of asset - Depreciation expense

= $ 25,000,000 - $ 10,000,0000

= $ 15,000,000