Assume that at the beginning of 2015 Fast Delivery purchased

Assume that at the beginning of 2015 Fast Delivery purchased a used Jumbo 747 aircraft at a cost of $55,200,000. Fast Delivery expects the plane to remain useful for five years (6,800,000 miles) and to have a residual value of $5,200,000. Fast Delivery expects to fly the plane 835,000 miles the first year, 1,225,000 miles each year during the second, third, and fourth years, and 2,290,000 miles the last year.

1. Compute Fast Delivery\'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.

Answers:

A. Using the straight-line method, depreciation is $_________ for 2015 and $__________ for 2016.

B. Using the units-of-production method, depreciation is $__________ for 2015 and $__________ for 2016

C. Using the doubling-decling-balance method, depreciation is $_________ for 2015 and $________ for 2016

2.  

____________

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Solution

ans)

Straight line method

Depreciation = cost - salvage value / Estimated useful life

Depreciation for 2015 = 55,200,000 - 5,200,000 / 5

= 10,000,000

Depreciation for 2016 = 10,000,000

b)Units of production method

Depreciation = cost - salvage value / estimated number of units

= 55,200,000 - 5,200,000 / 6,800,000 miles

= 7.35 per mile

Depreciation for 2015 = 835000 X 7.35 per mile = 6,137,250

Depreciation for 2016 = 1225000 X 7.35 per mile = 9,003,750

C) Double declining balance method

Straight line depreciation rate = 1 / useful life of the asset

= 1 / 5

= 20%

Double decling balance rate = 20% X 2 = 40%

Depreciation for 2015 = 55200000 X 40% = 22,080,000

Depreciation for 2016 = (55200000 - 22080000) X 40% = 13,248,000

2) Book value at the end of first year under each depreciation method

Straight line method Units of production Double decling Balance

Book value 55,200,000 55,200,000 55,200,000

Less: Depreciation (10,000,000) (6,137,250) (22,080,000)

Book value at the end of 2015 45,200,000 49,062,750 33,120,000