Question

Assume that on September 30​, 2017​, Flyair​, an international airline based in​ Germany, purchased a Jumbo aircraft at a cost of euro 45,000,000 ​(euro is the symbol for the​ euro). Flyair expects the plane to remain useful for four years ​(4,000,000 ​miles) and to have a residual value of euro 6,000,000. Flyair will fly the plane 350 comma 000 miles during the remainder of 2017. Compute LuxAir's depreciation on the plane for the year ended December 31, 2015, using the following methods:
a. Straight-line
b. Units-of-production
c. Double-declining-balance

Which method would produce the highest net income for 2015? Which method produces the lowest net income?

Answer 1

Answer: Highest income=The units of Production method of depreciation with $3,412,500

Lowest income=double declining depreciation method with $18,000,000

Explanation:

a) Using Straight line depreciation method

(Cost of value - Salvage value)/ Useful life =(45,000,000 -6,000,000)/5 =$7,800,000

b)Using  Units-of-production depreciation method

Depreciation Expense = (Cost – Salvage value) x (Number of units produced / Life in number of units)

=45,000,000 -6,000,000) x (350,000/4,000,000)= $3,412,500

b)Using Double-declining-balance  depreciation method

Depreciation Expense = Beginning book value x Rate of depreciation

Rate of depreciation = 100% / useful life x 2= 100/5 x2 = 40 %

Depreciation expense = 40 % x $45,000,000 =$18,000,000

or you use this method directly= 45,000,000/5 x 2= $18,000,000

Now the highest income will come from the depreciation with least expense and from our calculation,  the depreciation method with the least expense is from The units of Production method with $3,412,500

In the same vein, the lowest income will come from the most depreciation expense, therefore the most depreciation expense is from the double declining method with $18,000,000