At the beginning of the year, Logan Services purchased a used airplane for $65,0

Question

At the beginning of the year, Logan Services purchased a used airplane for $65,000,000. Logan Services expects the plane to remain useful for 4 years (6 million miles) and to have a residual value of $5,000,000. The company expects the plane to be flown 1.3 million miles the first year.

1. Compute Logan Services’ first year depreciation on the plane using the following methods:

            a) Straight-Line

            b) Units-of-production

2. Show the airplane’s book value at the end of the first year under the straight-line method.

Explanation / Answer

1. Compute Logan Services’ first year depreciation on the plane using the following methods:
Cost of the airplane         $65,000,000
Less : Residual value         $5,000,000
Depreciable cost              $60,000,000

First year depreciation
a) Straight-Line    $60,000,000 / 4 = $15,000,000

b) Units-of-production      $60,000,000 x 1,300,000 / 6,000,000
                                    = $13,000,000

2. Show the airplane’s book value at the end of the first year under the straight-line method.
    
    Cost                                            $65,000,000
    Less : Accumulated depreciation   $15,000,000
    Book Value                                   $50,000,000

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