Delta and Singapore Airlines Case:
1. a. Delta Airlines Depreciation Method Depreciation Method Salvage Value For every $100 mil Depreciated Annual Depreciation
Prior to 1986 Straight-line, 10 years 10% 100-(.1*100)=90 90/10=9 $9 mil
1968 – 1993 Straight-line, 15 years 10% 100-(.1*100)=90 90/15=6 $6 mil
After 1993 Straight-line, 20 years 5% 100-(.05*100)=95 95/20=4.75 $4.75 mil
b. Singapore Airlines Depreciation Method Depreciation Method Salvage Value For every $100 mil Depreciated Annual Depreciation
Prior to 1989 Straight-line, 8 years 10%=$10 100-(.1*100)=90 90/8=11.25 $9 mil
After 1989 Straight-line, 10 years 20%=$20 100-(.2*100)=80 80/10=8 $6 mil
2. Both use a straight line depreciation method to depreciate the value of the fleet on the Balance Sheet. However, as noted in the computations above, Singapore depreciates the value of its fleet twice as fast. Additionally, they assume a much higher salvage value of the total purchase price of the asset. The estimation of depreciation and salvage value are both assumptions of the company’s management.
There are several reasons to drive the company’s choice of depreciation schedule. Delta may have wanted to reduce depreciation expense recorded on the Balance Sheet and therefore increase the depreciation period to reduce the annual expenditure. As noted in the case text, Delta was reporting losses in other areas and wanted to improve their overall earnings through lessening the affect of fleet depreciation expense. Currently Delta depreciates over 20 years and Singapore depreciates over 10; a significant difference.
Some of the differences in the method chosen for depreciation can be based on the use and maintenance schedule of the fleet. In the case, it states that Delta gleaned 21% of its revenues from international travel. In contrast, 56% of Singapore’s revenues are for travel outside of Asia, and it can also be inferred that while 44% of its revenue come from Asia, not all of those are inner continental. If you assume
Prior to 1986 Straight-line, 10 years 10% 100-(.1*100)=90 90/10=9 $9 mil
1968 – 1993 Straight-line, 15 years 10% 100-(.1*100)=90 90/15=6 $6 mil
After 1993 Straight-line, 20 years 5% 100-(.05*100)=95 95/20=4.75 $4.75 mil
b. Singapore Airlines Depreciation Method Depreciation Method Salvage Value For every $100 mil Depreciated Annual Depreciation
Prior to 1989 Straight-line, 8 years 10%=$10 100-(.1*100)=90 90/8=11.25 $9 mil
After 1989 Straight-line, 10 years 20%=$20 100-(.2*100)=80 80/10=8 $6 mil
2. Both use a straight line depreciation method to depreciate the value of the fleet on the Balance Sheet. However, as noted in the computations above, Singapore depreciates the value of its fleet twice as fast. Additionally, they assume a much higher salvage value of the total purchase price of the asset. The estimation of depreciation and salvage value are both assumptions of the company’s management.
There are several reasons to drive the company’s choice of depreciation schedule. Delta may have wanted to reduce depreciation expense recorded on the Balance Sheet and therefore increase the depreciation period to reduce the annual expenditure. As noted in the case text, Delta was reporting losses in other areas and wanted to improve their overall earnings through lessening the affect of fleet depreciation expense. Currently Delta depreciates over 20 years and Singapore depreciates over 10; a significant difference.
Some of the differences in the method chosen for depreciation can be based on the use and maintenance schedule of the fleet. In the case, it states that Delta gleaned 21% of its revenues from international travel. In contrast, 56% of Singapore’s revenues are for travel outside of Asia, and it can also be inferred that while 44% of its revenue come from Asia, not all of those are inner continental. If you assume