Question

Assume that at the beginning of 2016, AirAsia, purchased a used Boeing 737 aircraft at a cost of 55,000,000. AirAsia expects the plane to remain useful for 5 years (7 million miles) and to have a residual value of 6,000,000. AirAsia expects to fly the plane 875,000 miles the first year; 1,475,000 miles each year during the second, third, and fourth years; and 1,700,000 miles the last year. Use the AirAsia data above to compute AirAsia's third year depreciation on the plane using the following methods (straight line, units of production, and double declining balance)

Answer 1

STRAIGHT LINE METHOD

Depreciation each year under the Straight line method = (Cost - Residual value) / Useful life

= ($55,000,000 - $6,000,000) / 5

= $9,800,000

UNITS OF PRODUCTION METHOD

Depreciation per mile under Units of production method = (Cost - Salvage value) / Expected miles

= ($55,000,000 - $6,000,000) / 7,000,000

= $7

Depreciation in the Year 3 = 1,475,000 miles * $7 per mile

= $10,325,000

DOUBLE DECLINING BALANCE METHOD

Depreciation under Double declining balance method = (Cost - Accumulated depreciation) / Useful life

Year	Accumulated depreciation	Depreciation expense
1	$0	$22,000,000 [($55,000,000-$0)/5*2]
2	$22,000,000	$13,200,000 [($55,000,000-$22,000,000)/5*2]
3	$35,200,000	$7,920,000 [($55,000,000-$35,200,000)/5*2]

Straight line	$9,800,000
Units of production	$10,325,000
Double declining balance	$7,920,000