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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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  1. 21 January, 18:39
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    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
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