Question

Assume that on September 30​, 2017​, Flyair​, an international airline based in​ Germany, purchased a Jumbo aircraft at a cost of euro 45,000,000 ​(euro is the symbol for the​ euro). Flyair expects the plane to remain useful for four years ​(4,000,000 ​miles) and to have a residual value of euro 6,000,000. Flyair will fly the plane 350 comma 000 miles during the remainder of 2017. Compute LuxAir's depreciation on the plane for 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

To compute Flyair's depreciation on the plane for the year ended December 31, 2015, we need to use the straight-line method, units-of-production method, and double-declining-balance method. The straight-line method spreads the depreciation expense evenly over the useful life of the plane, resulting in the lowest expense and highest net income. The double-declining-balance method accelerates the depreciation expense in the early years, resulting in the highest expense and lowest net income.

Step-by-step explanation:

To compute Flyair's depreciation on the plane for the year ended December 31, 2015, we need to use the straight-line method, units-of-production method, and double-declining-balance method.

Straight-Line Method:

The straight-line method depreciates an asset evenly over its useful life. In this case, the useful life of the plane is 4 years, so the annual depreciation expense would be calculated as:

Depreciation Expense = (Cost - Residual Value) / Useful Life = (€45,000,000 - €6,000,000) / 4 = €9,750,000

Units-of-Production Method:

The units-of-production method calculates depreciation based on the actual usage or mileage of the plane. Given that Flyair flew the plane 350,000 miles in 2017, we can calculate the depreciation expense for the year:

Depreciation Expense = (Cost - Residual Value) / Total Estimated Miles * Miles Flown = (€45,000,000 - €6,000,000) / 4,000,000 * 350,000 = €9,187,500

Double-Declining-Balance Method:

The double-declining-balance method accelerates depreciation in the early years of an asset's life. The annual depreciation rate for this method is calculated as double the straight-line rate, which is 100% / Useful Life. For this plane, the annual depreciation rate would be 100% / 4 = 25%. Applying this rate to the net book value each year, we can calculate the depreciation expense for 2015:

Depreciation Expense = Net Book Value at the Start of the Year * Depreciation Rate = (Cost - Accumulated Depreciation) * Depreciation Rate = (€45,000,000 - 0) * 25% = €11,250,000

The method that produces the highest net income for 2015 is the straight-line method. This is because it spreads the depreciation expense evenly over the useful life of the plane, resulting in a lower expense compared to the units-of-production method and double-declining-balance method.

The method that produces the lowest net income for 2015 is the double-declining-balance method. This is because it accelerates the depreciation expense in the early years, resulting in a higher expense compared to the straight-line method and units-of-production method.

Answer 2

Answer: Highest income=The units of Production method of depreciation with $3,412,500

Lowest income=double declining depreciation method with $18,000,000

Step-by-step explanation:

a) Using Straight line depreciation method

(Cost of value - Salvage value)/ Useful life =(45,000,000 -6,000,000)/5 =$7,800,000

b)Using Units-of-production depreciation method

Depreciation Expense = (Cost – Salvage value) x (Number of units produced / Life in number of units)

=45,000,000 -6,000,000) x (350,000/4,000,000)= $3,412,500

b)Using Double-declining-balance depreciation method

Depreciation Expense = Beginning book value x Rate of depreciation

Rate of depreciation = 100% / useful life x 2= 100/5 x2 = 40 %

Depreciation expense = 40 % x $45,000,000 =$18,000,000

or you use this method directly= 45,000,000/5 x 2= $18,000,000

Now the highest income will come from the depreciation with least expense and from our calculation, the depreciation method with the least expense is from The units of Production method with $3,412,500

In the same vein, the lowest income will come from the most depreciation expense, therefore the most depreciation expense is from the double declining method with $18,000,000