Question

Computing second-year depreciation and accumulated depreciationAt the beginning of 2016, Air Asia purchased a used airplane at a cost of $40,000,000. Air Asia expects the plane to remainuseful for eight years (5,000,000 miles) and to have a residual value of $5,000,000. Air Asia expects the plane to be flown1,200,000 miles the first year and 1,400,000 miles the second year.Requirements1 Compute second-year (2017) depreciation expense on the plane using the following methods:a. Straight-lineb. Units-of-productionc Double-declining-balance2 Calculate the balance in Accumulated Depreciation at the end ofthe second year for all three methods.

Answer 1

The second-year depreciation expenses for Air Asia's used airplane are $4,375,000 using the straight-line method, $9,800,000 using the units-of-production method, and $7,500,000 using the double-declining-balance method. The accumulated depreciation at the end of the second year is $8,750,000, $18,200,000, and $17,500,000 respectively for each method.

Step-by-step explanation:

To calculate the second-year depreciation for Air Asia's airplane using different methods, one must first understand the cost, useful life, residual value, and usage which have been provided.

• Straight-Line Depreciation Method

For the straight-line method, the annual depreciation expense is the same each year. It is calculated as:

Total Depreciation = (Cost - Residual Value) / Useful Life
Annual Depreciation Expense = ($40,000,000 - $5,000,000) / 8 years

= $4,375,000

The second-year depreciation expense for 2017 using the straight-line method is also $4,375,000.

• Units-of-Production Depreciation Method

For units-of-production method, the depreciation expense is based on usage. The depreciation rate per mile is:

Depreciation Rate per Mile = (Cost - Residual Value) / Total Expected Miles
Depreciation Rate per Mile = ($40,000,000 - $5,000,000) / 5,000,000 miles

= $7 per mile

The second-year depreciation expense = Depreciation Rate per Mile * Miles Flown in the Second Year
Second-year depreciation expense = $7 * 1,400,000 miles

= $9,800,000.

• Double-Declining-Balance Depreciation Method

The double-declining-balance method accelerates depreciation. First, calculate the straight-line rate, then double it.

Straight-Line Rate = 1 / Useful Life = 1/8

= 0.125 or 12.5%
Double-Declining Rate = 2 * Straight-Line Rate

= 25%

In the first year, we deprecate 25% of the book value, which was $40,000,000, so the first year depreciation is:

First-Year Depreciation = 25% * $40,000,000

= $10,000,000

At the end of the first year, the book value is:

End of First Year Book Value = Cost - First Year Depreciation

= $40,000,000 - $10,000,000

= $30,000,000

The second-year depreciation using the double-declining method is:

Second-Year Depreciation = 25% * End of First Year Book Value

= 25% * $30,000,000

= $7,500,000

The balance in Accumulated Depreciation at the end of the second year for each method is:

• Straight-Line: First Year ($4,375,000) + Second Year ($4,375,000) = $8,750,000

• Units-of-Production: First Year (based on 1,200,000 miles) + Second Year ($9,800,000) = Total Miles first year * $7 + $9,800,000 = $8,400,000 + $9,800,000 = $18,200,000

• Double-Declining-Balance: First Year ($10,000,000) + Second Year ($7,500,000) = $17,500,000

These numbers indicate the total value of depreciation that has been recorded for the airplane after two years under each method.

Answer 2

1. a.$4,375,000

b. $7,500,000

c. $9,800,000

2. $8,750,000

$18,200,000

$17,500,000

Step-by-step explanation:

1. The computation of the depreciation expense for the second year is presented below:

a) Straight-line method:

= (Purchase value of airplane - residual value) ÷ (useful life)

= ($40,000,000 - $5,000,000) ÷ (8 years)

= ($35,000,000) ÷ (8 years)

= $4,375,000

In this method, the depreciation is same for all the remaining useful life

(b) Double-declining balance method:

First we have to find the depreciation rate which is shown below:

= One ÷ useful life

= 1 ÷ 8

= 12.5%

Now the rate is double So, 25%

In year 1, the original cost is $40,000,000 so the depreciation is $10,000,000 after applying the 25% depreciation rate

And, in year 2, the $30,000,000 × 25% = $7,500,000

(c) Units-of-production method:

= (Purchase value of airplane - residual value) ÷ (estimated miles)

= ($40,000,000 - $5,000,000) ÷ ($5,000,000 miles)

= ($35,000,000) ÷ ($5,000,000 miles)

= $7 per miles

In first year, it would be

= Miles in first year × depreciation per miles

= 1,200,000 miles × $7

= $8,400,000

Now for the second year, it would be

= Miles in second year × depreciation per miles

= 1,400,000 miles × $7

= $9,800,000

2. The calculation of the accumulated depreciation balance would be

Straight line method:

= $4,375,000 + $4,375,000

= $8,750,000

Double-declining balance method:

= $10,000,000 + $7,500,000

= $17,500,000

Units-of-production method:

= $8,400,000 + $9,800,000

= $18,200,000