Delta Airlines has airplanes with original cost of $8 billion and net book value

Question

Delta Airlines has airplanes with original cost of $8 billion and net book value of $4.4 billion as of June 30, 2009. Delta depreciates its airplanes for financial reporting purposes on a straight line basis over 10-year lives to a salvage value equal to 10 percent of original cost. Delta announces a change in depreciation policy; from July 1, 2009, it will use 15-year lives and salvage values equal to 15 percent of original cost. The airplanes are all five years old as of June 30, 2009. Provide the footnote disclosure related to Delta’s change in depreciation policy for the year ended June 30, 2010. Show calculations. Old depreciation is (8 B -0.8 B)/ 10 years = $720 Million. I am having trouble with new depreciation. it shows calculation of new depreciation (4.4B -3.2B) /10 Years, but how can I get the 3.2 B?

Explanation / Answer

As change is made from July 1, 2009 so take net book value as a base = $4.4B

Less:

Salvage values @ 15 percent of original cost (8B x 15 / 100)                  = $1.20B

Amount to be depreciated                                                                            = $3.2B

New depreciation will be ($3.20 / 10) = $0.32B or $320 Million.

(Thus $3.2B is come after deducting salvage value from net book value.)

Note:

It is given in the question that the airplanes are all five years old as of June 30, 2009, so new depreciation is calculated on the basis of 10 years.

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