Question

Required information [The following information applies to the questions displayed below.] A recent annual report for Celtic Air Lines included the following note: NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Maintenance Costs We record maintenance costs related to our fleet in aircraft maintenance materials and outside repairs. Maintenance costs are expensed as incurred, except for costs incurred under power-by-the-hour contracts, which are expensed based on actual hours flown. Modifications that enhance the operating performance or extend the useful lives of airframes or engines are capitalized and amortized over the remaining estimated useful life of the asset or the remaining lease term, whichever is shorter. Assume that Celtic made extensive repairs on an airplane engine, increasing the fuel efficiency and extending the useful life of the airplane. The existing airplane originally cost $4,700,000, and by the end of last year, it was half depreciated based on use of the straight-line method, a 20-year estimated useful life, and no residual value. During the current year, the following transactions related to the airplane were made: a. Ordinary repairs and maintenance expenditures for the year, $710,000cash. b. Extensive and major repairs to the airplane's engine, $2,860,000 cash. These repairs were completed at the end of the current year. c. Recorded depreciation for the current year. 2. What was the net book value of the aircraft on December 31 of the current year?

Answer 1

The net book value of the aircraft on December 31 of the current year is $2,350,000.

Step-by-step explanation:

The net book value of the aircraft on December 31 of the current year can be calculated by subtracting the accumulated depreciation from the original cost of the aircraft. In this case, since the aircraft was half depreciated based on the straight-line method and a 20-year estimated useful life, we can calculate the accumulated depreciation as follows:

Depreciation per year = Cost of the aircraft / Useful life = $4,700,000 / 20 = $235,000

Accumulated depreciation = Depreciation per year * Number of years depreciated = $235,000 * 10 (since it was half depreciated) = $2,350,000

Net book value of the aircraft = Cost of the aircraft - Accumulated depreciation = $4,700,000 - $2,350,000 = $2,350,000

Answer 2

The net book value of the aircraft on December 31 of the current year is $4,975,000, calculated by adding the capitalized repairs to the original cost and subtracting the accumulated depreciation including the current year's expense.

Step-by-step explanation:

To calculate the net book value of the aircraft on December 31 of the current year, we need to consider the original cost, accumulated depreciation, and any capital expenditures made during the year. The aircraft originally cost $4,700,000 and was half depreciated, which means an accumulated depreciation of $2,350,000. The repairs that improve fuel efficiency and extend the useful life are capitalized, adding $2,860,000 to the aircraft's book value. We also need to factor in depreciation for the current year.

The annual depreciation expense is calculated based on the original useful life of 20 years, which amounts to $235,000 per year ($4,700,000 / 20 years). Therefore, the net book value on December 31 is calculated as the original cost plus capital expenditures minus accumulated depreciation, including the current year's depreciation.

Here is the breakdown:

• Original cost: $4,700,000
• Accumulated depreciation up to last year: $2,350,000
• Depreciation for the current year: $235,000
• Capitalized repairs: +$2,860,000

Net book value = Original cost + Capitalized repairs - (Accumulated depreciation up to last year + Depreciation for the current year)

Net book value = $4,700,000 + $2,860,000 - ($2,350,000 + $235,000)

Net book value = $4,975,000