Computing second-year depreciation and accumulated depreciationAt the beginning of 2016, Air Asia purchased a used airplane at a cost of $40,000,000. Air Asia expects the plane to remainuseful for eight years (5,000,000 miles) and to have a residual value of $5,000,000. Air Asia expects the plane to be ﬂown1,200,000 miles the ﬁrst year and 1,400,000 miles the second year. Requirements1 Compute second-year (2017) depreciation expense on the plane using the following methods:a. Straight-lineb. Units-of-productionc Double-declining-balance2 Calculate the balance in Accumulated Depreciation at the end ofthe second year for all three methods.

Question

Camille Orozco

Business

21 January, 18:28

Computing second-year depreciation and accumulated depreciationAt the beginning of 2016, Air Asia purchased a used airplane at a cost of $40,000,000. Air Asia expects the plane to remainuseful for eight years (5,000,000 miles) and to have a residual value of $5,000,000. Air Asia expects the plane to be ﬂown1,200,000 miles the ﬁrst year and 1,400,000 miles the second year. Requirements1 Compute second-year (2017) depreciation expense on the plane using the following methods:a. Straight-lineb. Units-of-productionc Double-declining-balance2 Calculate the balance in Accumulated Depreciation at the end ofthe second year for all three methods.

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Jada · Answer 1

1. a.$4,375,000

b. $7,500,000

c. $9,800,000

2. $8,750,000

$18,200,000

$17,500,000

Explanation:

1. The computation of the depreciation expense for the second year is presented below:

a) Straight-line method:

= (Purchase value of airplane - residual value) : (useful life)

= ($40,000,000 - $5,000,000) : (8 years)

= ($35,000,000) : (8 years)

= $4,375,000

In this method, the depreciation is same for all the remaining useful life

(b) Double-declining balance method:

First we have to find the depreciation rate which is shown below:

= One : useful life

= 1 : 8

= 12.5%

Now the rate is double So, 25%

In year 1, the original cost is $40,000,000 so the depreciation is $10,000,000 after applying the 25% depreciation rate

And, in year 2, the $30,000,000 * 25% = $7,500,000

(c) Units-of-production method:

= (Purchase value of airplane - residual value) : (estimated miles)

= ($40,000,000 - $5,000,000) : ($5,000,000 miles)

= ($35,000,000) : ($5,000,000 miles)

= $7 per miles

In first year, it would be

= Miles in first year * depreciation per miles

= 1,200,000 miles * $7

= $8,400,000

Now for the second year, it would be

= Miles in second year * depreciation per miles

= 1,400,000 miles * $7

= $9,800,000

2. The calculation of the accumulated depreciation balance would be

Straight line method:

= $4,375,000 + $4,375,000

= $8,750,000

Double-declining balance method:

= $10,000,000 + $7,500,000

= $17,500,000

Units-of-production method:

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

= $18,200,000