Essay About First Year And Net Book Value Of The Aircrafts

Depreciation at Delta Air Lines
Essay Preview: Depreciation at Delta Air Lines
2 rating(s)
Report this essay
Depreciation at Delta Air Lines:The “Fresh Start”Question 1There are several reasons why Delta Air Lines and many other competitors decided to change extend the lives of their flight equipment and changed the residual values.First, as the technology evolved and planes changed from piston engine to jet engines, the physical life of aircraft has been extended. The extension of depreciation period is a natural result of this factor.Second, since the jet engine was introduced to the industry, the fact that whether the planes are new or old no longer became an issue. Size of the planes and the economy of operation were regarded as more important issues. This lengthened the recycle process of the airline carriers and eventually extended the life of operating aircrafts.Lastly, deregulation have brought competitive pricing so that many airline carriers with diverse strategy and strength have driven the competition to a higher stage. This has led the airlines to extend the depreciable lives of aircrafts so that they can lower their depreciation costs for higher incomes.Question 2(unit: USD, years)YearAircraftPurchase priceResidualResidual ValueUseful livesDepreciation per year (first year)1985MD8833,000,00010%3,300,000102,970,0001988MD8839,000,00010%3,900,000152,340,0001992B-757-20066,000,00010%6,600,000153,960,0001993B-757-20068,000,0005%3,400,000203,230,0002006B-777-200ER210,000,0005%10,500,000257,980,0002007B-777-200ER220,000,00010%22,000,000306,600,000Question 3Before the application of “fresh start” accounting, all the aircrafts in the above list that Delta currently own would be recorded as “Flight equipment” and the accumulated depreciation for such aircrafts throughout the years will be listed as “Accumulated depreciation” under the flight equipment item. So the net book value of the aircrafts in the Question 2 will be “purchase price – accumulated depreciation” (according to the years each aircraft has spent since Delta bought them).Compare to this, after the “fresh start”, Delta has re-valued its assets to fair value and did the impairments which reduced their net book value of assets by $1.316 billion. This will have clearly reduced the net book value of the aircrafts listed in Question 2. Also, for the aircraft which hasn’t finished their depreciation in terms of useful lives, their depreciation period might have extended and residual value could have changed. This will eventually lead to less depreciation for each year.Question 4.For the net book value of “fresh start” balance sheet for December 31, 2007, we simply divide the aircrafts regarding their useful lives and depreciation periods.For planes which useful lives has already ended (MD88 (year 1985), MD88 (year 1988) and B-757-200 (year 1992)), their residual value would be regarded as the net book value unless there is some other reasons for impairments. For planes which are still going down the depreciation period (B-757-200 (year 1993), B-777-200ER (year 2006) and B-777-200ER (year 2007)), we first need to calculate the current fair value of the aircraft subtracting the accumulated depreciations since we bought it. After we come up with the current fair value, we should recalculate its residual value (10% of cost) and depreciation per year (30 years of life expectancy) with the changed accounting policy after the “fresh start”.