This is the full question:
At the beginning of 2016, Air Asia purchased a used airplane at a cost of $40,000,000. Air Asia expects the plane to remain useful for eight years (5,000,000 miles) and to have a residual value of $5,000,000. Air Asia expects the plane to be flow 1,200,000 the first year and 1,400,000 the second year.
1) Compute second-year (2017) depreciation expense using the following methods
a. Straight-line
b. Units-of-production
c. Double-declining-balance
2) Calculate the balance in Accumulated Depreciation at the end of the second year for all three methods:
Answer:
Explanation:
1)a) Straight-line
Depreciable base = Cost of the Asset - Residual Value
= $40,000,000 - $5,000,000
= $35,000,000
Depreciation expense per year = Depreciable base / years of useful life
= $35,000,000 / 8
= $4,375,000
The depreciation expense for the second year is = $4,375,000
b) Units-of-production
Units of Production Rate = Depreciable Base / Units Over Useful Life
= $35,000,000 / 5,000,000 miles
= 7
Depreciation Expense = Units of Production Rate x Actual Units Produced
= 7 x 1,400,000 miles in the second year
= $9,800,000
c. Double-declining-balance
Double-declining balance = 2 x (Asset Cost - Residual Value ) / Useful Life of the Asset
= 2 x ($40,000,000 - $5,000,000) / 8
= $8,750,000
2) a) Straight-line Accumulated depreciation
We simply multiply the previous answer by two = $4,375,000 x 2
= $8,750,000
2) b) Units-of-production Accumulated depreciation
First we find the depreciation expense for the first year using the same formula as above
= 7 x 1,200,000
= $8,400,000
Finally we simply add up depreciation expense for the two years
= $8,400,000 + $9,800,000
= $18,200,000
2) c) Double-declining-balance Accumulated depreciation
We simply multiply the first result by two = $8,750,000 x 2
= $17,500,000
