S7-4. (Learning Objective 3: Compute depreciation and book value by three method

Question

S7-4. (Learning Objective 3: Compute depreciation and book value by three methods- year only) Assume that at the beginning of 2015 QuickAir purchased a used Jumbo 747 aircraft at a cost of $56,700,000. Quick Air expects the plane to remain useful for five years 5,000,000 miles) and to have a residual value of $4,700,000. QuickAir expects to fly the plane 775,000 miles the first year, 1,200,000 miles each year during the second, third, and fourth years, and 625,000 miles the last year 1. Compute QuickAir's depreciation for the first two years on the plane using the following methods: a. Straight-line method b. Units-of-production method (round depreciation per mile to the closest cent) c. Double-declining-balance method 2, Show the airplane's book value at the end of the first year under each depreciation method.

Explanation / Answer

1 a) Straight line depreciation (cost - salvage value)/useful life (56,700,000-4,700,000)/5 10400000 Depreciation expense year 1         10,400,000 year 2         10,400,000 b) units of prodcution method dep rate = (56,700,000-4,700,000)/5,000,000 10.4 per mile Depreciation expense year 1           8,060,000 year 2         12,480,000 c) Double declining method rate = 1/5*2 0.4 or 40% Depreciation expense year 1         22,680,000 year 2         13,608,000 2) book value Straight line orginal cost 56,700,000 less accumulated depreciation (10,400,000) book value 46,300,000 units of production method orginal cost 56,700,000 less accumulated depreciation     (8,060,000) book value 48,640,000 double declining method orginal cost 56,700,000 less accumulated depreciation (22,680,000) book value 34,020,000

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