Chapter 9: Q3SE (page 526)

Computing first-year depreciation and book value
On January 1, 2018, Air Canadians purchased a used airplane for $37,000,000. Air Canadians expects the plane to remain useful for five years (4,000,000 miles) and to have a residual value of $5,000,000. The company expects the plane to be flown 1,400,000 miles during the first year.
Requirements
1. Compute Air Canadians’s first-year depreciation expense on the plane using the following methods:
a. Straight-line
b. Units-of-production
c. Double-declining-balance
2. Show the airplane’s book value at the end of the first year for all three methods.

Short Answer

Expert verified

Depreciation	Value at end of the first year
$6,400,000	$30,600,000
$11,200,000	$25,800,000
$14,800,000	$22,200,000

Step by step solution

Definition of Straight Line Method

The method of calculating depreciation under which each year of the asset's useful life reports the same depreciation is known as the straight-line method. The depreciation method under this method is calculated using salvage value, cost, and useful life.

Calculation of depreciation

a. Straight line

$\begin{array}{rcl} D e p r e c i a t i o n & = & \frac{C o s t - S a l v a g e v a l u e}{E s t i m a t e d u s e f u l l i f e i n y e a r s} \\ = & \frac{$ 37, 000, 000 - $ 5, 000, 000}{5} \\ = & $ 6, 400, 000 \end{array}$

b. Units of production method

$\begin{array}{rcl} D e p r e c i a t i o n & = & \frac{C o s t - S a l v a g e v a l u e}{E s t i m a t e d u s e f u l l i f e i n m i l e s} \times M i l e s r u n d u r i n g f i r s t y e a r \\ = & \frac{$ 37, 000, 000 - $ 5, 000, 000}{4, 000, 000} \times 1, 400, 000 \\ = & $ 11, 200, 000 \end{array}$

c. Double-declining method:

$\begin{array}{rcl} D e p r e c i a t i o n & = & C o s t \times \frac{100 %}{U s e f u l l i f e} \times 2 \\ = & $ 37, 000, 000 \times \frac{100 %}{5} \times 2 \\ = & $ 37, 000, 000 \times 20 % \times 2 \\ = & $ 14, 800, 000 \end{array}$

Book value at the end of the first year

Method	Book value	-	Depreciation	=	Value at end of the first year
Straight line	$37,000,000	-	$6,400,000	=	$30,600,000
Units of production	$37,000,000	-	$11,200,000	=	$25,800,000
Double declining method	$37,000,000	-	$14,800,000	=	$22,200,000

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Short Answer

Step by step solution

Definition of Straight Line Method

Calculation of depreciation

Book value at the end of the first year

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