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Computing first-year depreciation and book valueAt the beginning of the year, Austin Airlines purchased a used airplane for $33,500,000. Austin Airlines expects the planeto remain useful for five years (4,000,000 miles) and to have a residual value of $5,500,000. The company expects theplane to be flown 1,100,000 miles during the first year.RequirementsL Compute Austin Airlines’s first-year depreciation expense on the plane using the following methods:a. Straight-lineb. Units-of-productionc Double-declining-balanceZ Show the airplane's book value at the end of the first year for all three methods.

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Answer:

Depreciation under 3 methods:

A. SLM: Depreciation $5,600,000

B. Units Of Production: Depreciation $9,212,500

C. Double Declining Method:  Depreciation $13,400,000

Explanation:

A. Under Straight line method, depreciation as computed as:

[tex]=\frac{cost\ of\ asset - residual\ value}{useful\ life}[/tex]

[tex]=\frac{33,500,000 - 5,500,000}{5}[/tex]

Depreciation = $5,600,000

Book Value at the end of first year = $27,900,000

B. Units Of Production Method:

  Depreciation:

[tex]=\frac{(Cost\times\ miles\ flown\ during\ first\ year)}{total\ life\ of\ asset\ in\ miles}[/tex]

[tex]=\frac{(33500000\times\ 1,100,000)}{4,000,000}[/tex]

= 9,212,500

Book Value at the end of first year = 24,287,500

C. Double Declining Method: Depreciation= [tex]\frac{1}{5}[/tex]

= 20% per annum

Under double decline , at double the rate i.e 40%

Thus, Depreciation = 40% of 33,500,000= 13,400,000

Book Value at the end of the year = 33,500,000- 13,400,000 = 20,100,000