Question

On January 1, 2018, Advanced Airline purchased a used airplane at a cost of $60,500,000. Advanced Airline expects the plane to remain useful for eight years (5,000,000 miles) and to have a residual value of $5,500,000. Advanced Airline expects the plane to be flown 1,100,000 miles the first year and 1,200,000 miles the second year.

Requirements
1.​Compute first-year (2019) depreciation expense on the plane using the following methods:
a.​Straight-line
b.​Units-of-production
2.​Show the airplane’s book value at the end of the first year for the two methods.

Answer 1

Answer:

Results are below.

Explanation:

First, we need to calculate the annual depreciation using the straight-line method:

Annual depreciation= (original cost - salvage value)/estimated life (years)

Annual depreciation= (60,500,000 - 5,500,000) / 8

Annual depreciation= $6,875,000

Now, using the units of production method:

Annual depreciation= [(original cost - salvage value)/useful life of production in miles]*miles operated

Annual depreciation= [(55,000,000 / 5,000,000)]*1,100,000

Annual depreciation= $12,100,000

Finally, the book value:

Book value= purchase price - accumulated depreciation

Straight-line:

Book value= 60,500,000 - 6,875,000= $53,625,000

Units-of-production:

Book value= 60,500,000 - 12,100,000=  $48,400,000