# Depreciation at Delta & Singapore Airlines

Pages: 6 (1382 words) Published: January 10, 2010
Financial Accounting

Depreciation at Delta Airlines & Singapore Airlines
(Solution to Case #2)
24th November, 2009

1. Calculate the annual depreciation expense that Delta and Singapore would record for each \$100 gross value of aircraft.

a. Delta:
i. Prior to July 1, 1986 the Delta airline assets were depreciated using Straight Line Method at 10% for 10 years for a salvage value of 10%. Depreciation Expense = (Cost of Asset – Salvage Value) / number of year Depreciation Expense = (100.00 – 10.00) / 10 =

9 dollars for every 100 dollars of airline equipment

ii. From July 1, 1986 to March 31, 1993 the depreciation was Straight line at 10% for 15 years for a salvage value of 10%. Therefore Depreciation Expense = (Cost of Asset – Salvage Value) / number of year Depreciation Expense = (100.00 – 10.00) / 15=

6 dollars for every 100 dollars of airline equipment

iii. After April 1, 1993 depreciation was at 5% salvage value for 20 years Depreciation Expense = (Cost of Asset – Salvage Value) / number of year Depreciation Expense = (100.00 – 5.00) / 20 =

4.75 dollars for every 100 dollars of airline equipment

b. Singapore:
i. Prior to April1, 1989 – Depreciation was at 10% salvage value for 8 years Depreciation Expense = (Cost of Asset – Salvage Value) / number of year Depreciation Expense = (100.00 – 10.00) / 8 =

11.25 dollars for every 100 dollars of airline equipment

ii. After to April1, 1989 – Depreciation was at 20% residual value for 10 years Depreciation Expense = (Cost of Asset – Salvage Value) / number of year Depreciation Expense = (100.00 – 20.00) / 10 =

8 dollars for every 100 dollars of airline equipment [pic]
2. Are the differences in the ways the two airlines account for depreciation expense significant? Why would the companies depreciate aircraft using different depreciable lives and salvage values? What reasons could be given to support these differences? Is different treatment proper?

We can create an analytical model looking at the above assumptions and calculations. The range between the depreciation of Delta and Singapore airlines is 4.75 - 11.25, which is a vast difference even though both are using a similar method of depreciation, that of straight line method. Keeping in mind the airline industry the way of depreciation is very important as the value may rise to billions of dollars.

We can see in this case that both the airlines have a very different approach to depreciation. The average life calculated by Delta for its airline equipment 15-20 yrs with a low salvage value whereas for Singapore Airline is 8-10 years with a high salvage value. While delta over the years increases the useful life and decreases the salvage value of its assets and thereby reducing the depreciation expense, Singapore airlines charges a very high depreciation and over a period of time increases the salvage value and the useful life estimates. As a result of these, the Depreciation expense to total operating expense ratio for Delta (average depreciation expense from 1989 to 1993 is 5.3%) is much lower than Singapore airlines (average depreciation expense from 1989 to 1993 is 14.5%)

Companies would depreciate aircraft values depending on the following factors

1. The nature of the technology employed: - Technologically newer aircraft probably last longer than earlier, technologically less advanced aircraft. According to the exhibit3 and exhibit7, we can see that Singapore has more of the Boeing 747-400, but Delta doesn’t have any 747-400s.

2. The specific use that aircraft is given: - The case indicates that Singapore is a much longer-haul carrier than Delta. The average passenger trip length for Delta is about 900 miles, whereas the average passenger trip length for Singapore is about 2700 miles.

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