Q1 (a) DELTA AIRLINES Prior to july 1, 1986 Gross value Salvage value Time Depreciation expense Gross value

Salvage value Time Depreciation expense Gross value Salvage value Time Depreciation expense SINGAPORE AIRLINES Gross value Salvage value Time Depreciation expense Gross value Salvage value Time Depreciation expense 100 10 10 (100-10)/10

july 1, 1986 to March 31, 1993

100 10 15 (100-10)/15

April,1 1993 onwards

100 5 20 (100-5)/20 4.75

Q1(b)

Prior to april1, 1989

100 10 8 (100-10)/8

11.25

April1, 1989 onwards

100 20 10 (100-20)/10

Q3 Av Value of flight eqipment owned Av Value of flight equipment under lease Total Av Value 173 8867

8694

a) Difference in depreciation between delta old and new method adopted in 1993 Difference in depreciation 1.25 ( Figures taken from question1a : 6 - 4.75) per $100 of gross value Therefore the required difference in depreciation expense (1.25/100)*8867 110.8375

b) Difference in depreciation between delta and singapore airlines method Difference in depreciation 3.25 ( Figures taken from question1b: 11.25 - 8) per $100 of gross value Therefore the required difference in depreciation expense (3.25/100)*8867 288.1775 (less than that of singapore airlines)

Q2. The method of calculating depreciation is causing significant difference for the values of depreciation, being $4.75 for each $100 gross value for delta airlines and $11.25 for each $100 gross value for Singapore airlines. Though both are using SLM method, difference is due to difference in estimation of salvage value and useful life of the asset. Companies depreciate aircraft using different depreciable lives and salvage value because of the following reason: 1. Related to the product: The difference could be due to a. Extent of usage if usage is high, depreciation should be high and useful life and salvage value should be less.

2.

Kind and frequency of maintenance if the asset is maintained properly, depreciation should be low and useful life and salvage value should be high. c. Anticipated obsolescence high depreciation with lower salvage value and useful life. d. Replacement policy if the company plans to replace the asset in short spans of time, depreciation should be high with lesser useful life. Not related to the product: This would include the difference due to the needs of the financial statements. If a company is having a tough time and want to show more profit, it would reduce its depreciation expense by increasing the estimate of salvage value as well as useful life of the asset. Whereas, if a company is performing well, it might want to show higher depreciation in the present to be able to higher profits in future. It would do so by reducing the estimate of useful life and salvage value.

b.

In the given case, the difference in the estimated useful life seems to be because of reasons not related to the aircraft. This could be inferred because of the following reason.Singapore airline is using MEGATOP 747-400 which is the largest, fastest and long-haul aircraft in the world. Delta airline does not possess this aircrafts. Given to the advanced technology and longer life, the estimate of useful life should have been should have been more in case of Singapore airline, but it is not the case.Delta airline has changed its estimate of useful life increasing to 20 yrs from 15 yrs to reduce its depreciation expenses as it is working to cut down costs. Singapore airline (Asian airlines) was in a better condition than Delta airline (American airlines) and it did not felt the need to extend its useful life estimate of aircrafts to reduce its expenses. This is the reason why there is different in estimates. The reasons given to support the difference would be linked with the various reasons of difference in estimates which are related to the aircraft as mentioned above. If the difference is due to factors related to aircraft, it is proper. Whereas, if the difference in estimate is to manipulate the financial statements, it is not proper. Q4. Singapore airline maintains depreciation assumption different from Delta airline and charges a lower amount of depreciation than the latter. The depreciation expense is $4.75 for each $100 gross value for delta airlines and $11.25 for each $100 gross value for Singapore airlines. Singapore airline charges high depreciation by keeping the estimate of useful life lesser. Singapore airline loses on the current profits by showing a higher amount of depreciation. But, it creates an opportunity for higher profits in future years. It estimates it useful life to be lesser as compared to Delta airline. This could be considered in line with its high level of customer service as it would not use an asset for a long period but would replace it. Q5. Similar situation is assumed for both at the time of change with the only difference in average age, to compute the impact of difference in average age on the amount of depreciation expense that they record. The average life of the aircraft is considered to be the years the aircraft had been in use till date. For asset value = 100 DELTA AIRLINE Net Asset value Average age Amount depreciated Net value on date New salvage value estimated life left depreciation expense 20 8.8 (47.2 5)/11.2 3.767857143 depreciation expense [(100 10)/15]*8.8 100 52.5 100 8.8 52.8 47.2 5 11.2

Initial salvage value = 10 Final salvage value = 5 SINGAPORE AIRLINES Asset value Average age

Initial estimated time = 15 Final estimated time = 20 yrs 100 5 [(100 10)/15] * 5 30 100 30 70 5 20 5 (70 5)/15 4.333333333 15

Amount depreciated Net value on date New salvage value estimated life left