Depreciation at Delta Air Lines: the "Fresh Start"

Delta Airline: Guide Questions

1. What are some of the possible reasons why Delta Air Lines may have extended the lives of flight equipment and changed the residual values for depreciation purposes four times since 1986?

2. Assume that Delta Air Lines purchased the following six aircraft.

Aircraft Purchased in Selected Year

Year | Aircraft | Purchase Price ($ millions) | Air Craft No: |

1985 | MD 88 | $33 | D2882 |

1988 | MD 88 | $39 | D3921 |

1992 | B-757-200 | $66 | D3932 |

1993 | B-757-200 | $68 | D4061 |

2006 | B-777-200ER | $210 | D4972 |

2007 | B-777-200ER | $220 | D3921 |

What was the residual value of each aircraft and the first-year depreciation for each aircraft? (Use 25 years and residual values of 5% for 1993 through 2006 and 30 years and 10% of cost for 2007.).

3. Assume that each aircraft in Question 2 is still in Delta’s fleet in 2007. How would you estimate the net book value of aircraft before application of “fresh start” accounting in 2007? How would this compare to the “fresh start” value that Delta estimated in 2007 as described in the notes from the consolidated financial statements included in the Form 10-K and the case?

4. How should the net book value of each aircraft have been established for the “fresh start” balance sheet for December 31, 2007? For each aircraft how would you have established the depreciation for 2007?

5. In your opinion, should the possible adoption of “fresh start” accounting be open to any corporation where management feels traditional historical cost-based accounting no longer allows them to present a fair picture of the assets, liabilities, owners’ equity, and operating performance of that corporation?