To explore the effects of depreciation changes by Delta Airlines and Singapore Airlines (A) made in 1989 and 1993. 1. Calculate the annual depreciation expense that Delta and Singapore would record for each $100 gross value of aircraft.
Depreciation Expense = (Asset Value – Salvage Value) / Depreciable Life
| Prior to 7/1/1986| 7/1/1986 -3/31/1993| 4/1/1993 Onward | Depreciable Life| 10| 15| 20|
Salvage Value| 10%| 10%| 5%|
Depreciation Expense| $9.00 | $6.00 | $4.75 |
Singapore Airlines (A)|
| Prior to 4/1/1989| 4/1/1989 Onward|
Depreciable Life| 8| 10|
Salvage Value| 10%| 20%|
Depreciation Expense| $11.25 | $8.00 |
2. Are the differences in the ways that the two airlines account for depreciation expense significant?
Both Delta and Singapore Airlines calculate their aircraft depreciation expense using straight line depreciation. However, the depreciable lives and residual salvage values used in these calculations yield significantly different values. Delta Airlines uses longer depreciable lives and lower salvage values, while Singapore Airlines uses shorter depreciable lives and higher salvage values.
Why would companies depreciate aircraft using different depreciable lives and salvage values?
Typically, the depreciable lives and salvage values are reflective of matching the expense of an asset to the time in which it is used. Depending on the values chosen associated depreciation expenses will vary for each time period. Each company has an interest in incurring those expenses in a financially strategic manner.
What reasons could be given to support these differences?
In choosing the depreciable life and salvage value of an aircraft, many factors may be considered, not limited to: business plan objectives (having a relatively new fleet to...