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21 October, 16:15

Calculate the balance in Accumulated Depreciation at the end of the second year for all three methods

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  1. 21 October, 16:25
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    This is the full question:

    At the beginning of 2016, Air Asia purchased a used airplane at a cost of $40,000,000. Air Asia expects the plane to remain useful for eight years (5,000,000 miles) and to have a residual value of $5,000,000. Air Asia expects the plane to be flow 1,200,000 the first year and 1,400,000 the second year.

    1) Compute second-year (2017) depreciation expense using the following methods

    a. Straight-line

    b. Units-of-production

    c. Double-declining-balance

    2) Calculate the balance in Accumulated Depreciation at the end of the second year for all three methods:

    Answer:

    Explanation:

    1) a) Straight-line

    Depreciable base = Cost of the Asset - Residual Value

    = $40,000,000 - $5,000,000

    = $35,000,000

    Depreciation expense per year = Depreciable base / years of useful life

    = $35,000,000 / 8

    = $4,375,000

    The depreciation expense for the second year is = $4,375,000

    b) Units-of-production

    Units of Production Rate = Depreciable Base / Units Over Useful Life

    = $35,000,000 / 5,000,000 miles

    = 7

    Depreciation Expense = Units of Production Rate x Actual Units Produced

    = 7 x 1,400,000 miles in the second year

    = $9,800,000

    c. Double-declining-balance

    Double-declining balance = 2 x (Asset Cost - Residual Value) / Useful Life of the Asset

    = 2 x ($40,000,000 - $5,000,000) / 8

    = $8,750,000

    2) a) Straight-line Accumulated depreciation

    We simply multiply the previous answer by two = $4,375,000 x 2

    = $8,750,000

    2) b) Units-of-production Accumulated depreciation

    First we find the depreciation expense for the first year using the same formula as above

    = 7 x 1,200,000

    = $8,400,000

    Finally we simply add up depreciation expense for the two years

    = $8,400,000 + $9,800,000

    = $18,200,000

    2) c) Double-declining-balance Accumulated depreciation

    We simply multiply the first result by two = $8,750,000 x 2

    = $17,500,000
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