Depreciation at Delta Airlines and Singapore Airlines
Depreciation at Delta Airlines and Singapore Airlines
1. Calculate the annual depreciation expense that Delta and Singapore would record for each $100 gross value of aircraft.
(a) For Delta, what was its annual depreciation expense (per $100 of gross aircraft value) prior to July 1, 1986; from July 1, 1986 through March 31, 1993; and from April 1, 1993 on?
Prior to July 1: (100-10)/10 = $9 annual depreciation
From July 1, 1986 through March 31, 1993: (100-10)/15 = $6 annual depreciation
From April 1, 1993 on: (100-5)/20 = $4.75 annual depreciation
(b) For Singapore, what was its annual depreciation expense (per $100 of gross aircraft value) prior to April 1, 1989; and from April 1, 1989 on?
Prior to April 1, 1989: (100-10)/8 = $11.25 annual depreciation
From April 1, 1989 on: (100-20)/10 = $8 annual depreciation
2. Are the differences in the ways that the two airlines account for depreciation expense significant? Why would companies depreciate aircraft using different depreciable lives and salvage values? What reasons could be given to support these differences? Is different treatment proper?
Delta Airlines and Singapore Airlines both adopted straight-line method for depreciation. The difference between the two lied in their estimates of residual value and useful life of the aircraft. Singapore Airlines assumed a much shorter useful life and higher residual value of the aircraft. We view the differences as significant since Singapore Airlines depreciated the value of its aircraft almost twice as fast as Delta Airlines did.
The main reason why companies would depreciate aircraft using different depreciable lives and salvage values is that the management of the companies wanted to achieve certain earnings result. Delta Airlines kept showing loss since 1991 and therefore the management had the incentive to reduce operating expenses and make financial statements look better. Singapore Airlines took higher annual depreciation because they performed well
1. Calculate the annual depreciation expense that Delta and Singapore would record for each $100 gross value of aircraft.
(a) For Delta, what was its annual depreciation expense (per $100 of gross aircraft value) prior to July 1, 1986; from July 1, 1986 through March 31, 1993; and from April 1, 1993 on?
Prior to July 1: (100-10)/10 = $9 annual depreciation
From July 1, 1986 through March 31, 1993: (100-10)/15 = $6 annual depreciation
From April 1, 1993 on: (100-5)/20 = $4.75 annual depreciation
(b) For Singapore, what was its annual depreciation expense (per $100 of gross aircraft value) prior to April 1, 1989; and from April 1, 1989 on?
Prior to April 1, 1989: (100-10)/8 = $11.25 annual depreciation
From April 1, 1989 on: (100-20)/10 = $8 annual depreciation
2. Are the differences in the ways that the two airlines account for depreciation expense significant? Why would companies depreciate aircraft using different depreciable lives and salvage values? What reasons could be given to support these differences? Is different treatment proper?
Delta Airlines and Singapore Airlines both adopted straight-line method for depreciation. The difference between the two lied in their estimates of residual value and useful life of the aircraft. Singapore Airlines assumed a much shorter useful life and higher residual value of the aircraft. We view the differences as significant since Singapore Airlines depreciated the value of its aircraft almost twice as fast as Delta Airlines did.
The main reason why companies would depreciate aircraft using different depreciable lives and salvage values is that the management of the companies wanted to achieve certain earnings result. Delta Airlines kept showing loss since 1991 and therefore the management had the incentive to reduce operating expenses and make financial statements look better. Singapore Airlines took higher annual depreciation because they performed well