Question

Assume that on September 30, 2015, LoganAir, an international airline based in Germany, purchased a Jumbo aircraft at a cost of €50,000,000 (€ is the symbol for the euro). LoganAir expects the plane to remain useful for four years (8,000,000 miles) and to have a res value of €6,000,000. LoganAir will fly the plane 650,000 miles during the remainder of 2015. Compute LoganAir's depreciation on the plan the year ended December 31, 2015, using the following methods:

a. Straight-line
b. Units-of-production
c. Double-declining-balance
Which method would produce the highest net income for 2015? Which method produces the lowest net income?

Answer 1

LoganAir's depreciation for 2015 can be computed using straight-line (€3,562,500), units-of-production (€3,575,000), and double-declining-balance methods. The straight-line method would result in the highest net income, while the double-declining-balance method would result in the lowest net income for the year 2015.

Step-by-step explanation:

LoganAir, an international airline, purchased an aircraft for €50,000,000, expects to use it for four years or 8,000,000 miles, and anticipate a residual value of €6,000,000. The goal is to compute LoganAir's depreciation for the year ended December 31, 2015, using three different methods: the straight-line method, the units-of-production method, and the double-declining-balance method. Straight-line depreciation: This method spreads the cost of the asset evenly over its useful life. It can be calculated as follows:
(cost - residual value) / useful life. For LoganAir, the annual depreciation would be (€50,000,000 - €6,000,000) / 4 years = €11,000,000. Since the plane was in service for only part of the year, we calculate the proportionate depreciation for 650,000 miles, which results in €11,000,000 * (650,000 miles / 2,000,000 miles/year) = €3,562,500. Units-of-production depreciation: This method allocates the cost of an asset based on its usage. The depreciation per mile would be (€50,000,000 - €6,000,000) / 8,000,000 miles = €5.50 per mile. Multiplying this by the number of miles flown gives us €5.50 * 650,000 miles = €3,575,000 for 2015. Double-declining-balance depreciation: This method accelerates depreciation early in an asset's life. It is calculated as (2 / useful life) * book value at the start of the year. The calculation for 2015 is (2 / 4) * €50,000,000 = €25,000,000. Since the aircraft cannot be depreciated below its residual value, this method would need to be adjusted in subsequent years. The method that would produce the highest net income for 2015 would be the straight-line method because it results in the lowest depreciation expense in the first year. Conversely, the double-declining-balance method would result in the lowest net income due to the highest depreciation expense in the initial year.