Delta &Amp

Depreciation at Delta & Pan Am

Question 1

A) Estimate how Delta and Pan Am would account for the three events. Compute depreciation expense for each year through 1999. Ignore the effect of income taxes.

B) Repeat A assuming that both airlines use the double declining balance method of depreciation.

Question 2

Are the differences between the way each airline accounts for depreciation significant?

Yes, the difference between the way each airline accounts for depreciation is significant because PPE is a large asset category (usually greater than 50% of total assets) for most airline companies. Accordingly, the method of calculating depreciation is has a large impact on the taxes and earning reported by each firm. The depreciation method, residual value, and useful life used all implicate the depreciation expense. The significance of these variables is evident in the previous tables, where the change in useful life from 10 years to 15 years decreased the depreciation expense of Delta Air Lines by $130 million, and ultimately a $69 million increase in net income. In a comparative nature, if we were to assess a $50 million plane with the depreciation schedule used by Delta and Pan Am we would see the following depreciation expenses:

| Delta | | Pan Am |

Cost | 50,000,000 | Cost | 50,000,000 |

Residual Value (10%) | 5,000,000 | Residual Value (15%) | 7,500,000 |

Depreciable Amount | 45,000,000 | Depreciable Amount | 42,500,000 |

Life (years) | 15 | Life (years) | 25 |

Depreciation Expense | 3,000,000 | Depreciation Expense | 1,700,000 |

The depreciation expense recorded by Delta is almost twice that of Pan Am’s. This is a significant result, which can either inflate assets and net income as a result of lower yearly depreciation (as is the case with...