Depreciation: Airplanes and Garbage Trucks
Part I: Airplanes
Assume that on January 1, 2005, each of the three airlines purchases a new Boeing 757 for $75 million. Each airline estimates that the residual value will be 5% of cost. Each airline uses the average depreciation period that is consistent with its policies as stated in the Appendix, found on page 3. On January 1, 2009, each firm sells the plane. First, assume that Northwest sells its plane for $55 million, Delta sells its plane for $60 million, and United sells its plane for $65 million (Sale Price I). Second, assume each firm sells its plane for $60 million (Sale Price II).
Complete the following table. Report the dollar amounts in millions, rounded to thousands (i.e., $60 million as $60.000).
| Northwest | Delta | United |
Book Value January 1, 2005 | 75.000 | 75.000 | 75.000 | Residual | 3.750 | 3.750 | 3.750 |
Depreciable amount | 71.250 | 71.250 | 71.250 | Useful life | 14.500 | 20.000 | 27.500 |
Annual Depreciation | 4.914 | 3.563 | 2.591 | Accumulated Depreciation at December 31, 2008 | 19.656 | 14.252 | 10.364 | Book Value at December 31, 2008 | 55.344 | 60.748 | 64.636 | Sale Price I | 55.000 | 60.000 | 65.000 |
Gain (Loss) on Sale I | -0.344 | -0.748 | 0.364 | Sale Price II | 60.000 | 60.000 | 60.000 |
Gain (Loss) on Sale II | 4.656 | -0.748 | -4.636 |
Why would these three companies depreciate the same equipment using different useful lives? Describe at least two possible explanations.
The three companies could have chosen different useful lives for the same equipment for multiple reasons. One of the reasons would be to manipulate the income statement. If a company has an idea of when it might want to sell off an asset and approximately how much it...
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