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

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