Depreciation at Delta Air Lines and Singapore Airlines (a)

Depreciation at Delta Air Lines and Singapore Airlines (A)

1. Calculate the annual depreciation expense that Delta and Singapore would record for each $100 gross value of aircraft.

(a) For Delta, what was its annual depreciation expense (per $100 of gross aircraft value) prior to July 1, 1986; from July 1, 1986 through March 31, 1993; and from April 1, 1993 on?

Prior to July 1, 1986: (100 - 100*10%) / 10 = 9

From July1, 1986 through March 31, 1993: (100 - 100*10%) / 15 = 6

From April 1, 1993: (100 - 100*5%) / 20 = 4.75

(b) For Singapore, what was its annual depreciation expense (per $100 of gross aircraft value) prior to April 1, 1989; and from April 1, 1989 on?

Prior to April 1, 1989: (100 - 100*10%) / 8 = 11.25

From April1, 1989: (100 -100*20%)/10 = 8

2. Are the differences in the ways that the two airlines account for depreciation expense significant? Why would companies depreciate aircraft using different depreciable lives and salvage values? What reasons could be given to support these differences? Is different treatment proper?

(1)Because Delta announced a change in its depreciation assumptions regarding flight equipment in 1993 while Singapore didn’t, we will take the fiscal year of 1993 as standard for comparison.For each $100 gross value of aircraft, the annual depreciation expense for delta was $4.75; for Singapore Airlines was $8. The differences in the ways that the two airlines accout for depreciation expense are significant, because Delta airline had much longer asset depreciable lives compared with Singapore Airlines and because Delta had less residual values than Singapore Airlines.

(2) Because different airline companies have different business objectives and operating strategies, the methods and estimates used to determine the depreciable lives and salvage value vary widely among companies.

(3) In terms of operating strategies, Delta, at that time, was expanding its international operations and was in a comprehensive...