Estimating depreciation for matching with revenues during an accounting period requires determination of the cost, estimation of the life and residual value, and selecting a pattern for reporting depreciation over the life of the asset. Aircraft used by commercial airlines are expensive, have a finite life, and are sold and resold in a worldwide market to knowledgeable buyers. All major U. S. airlines use the straight-line method of depreciation.
Delta Air Lines has changed its assumptions about aircraft lives and residual values four times in the last 30 years or so. In the most recent changes, Delta adopted fair value accounting as part of its "fresh start" emergence from bankruptcy. The result of each of these policy changes has affected future asset values and present and future income.
1. What are some of the possible reasons why Delta Air Lines may have extended the lives of flight equipment and changed the residual values for depreciation purposes four times since 1986?
2. Assume that Delta Air Lines purchased the following six aircraft. What was the residual value of each aircraft and the first-year depreciation for each aircraft? (Use 25 years and residual values of 5% for 1993 through 2006 and 30 years and 10% of cost for 2007.) The useful life table in does call for a 20 year useful life for planes purchased in 1993, but please use 25 years).
Exhibit
Aircraft Purchased in Selected Years
| Purchase Year |
Aircraft |
Purchase Price ($milions) |
Aircraft Number |
| 1985 |
MD 88 |
33 |
D2851 |
| 1988 |
MD 88 |
39 |
D2882 |
| 1992 |
B-757-200 |
66 |
D3921 |
| 1993 |
B-757-200 |
68 |
D3932 |
| 2006 |
B-777-200ER |
210 |
D4061 |
| 2007 |
B-777-200ER |
220 |
D4972 |