...Depreciation at Delta Air Lines and Singapore Airlines (A) In the early 1990s, the American airline industry experienced a $12.8 billion loss. During this fragile economic state, airline companies reconsidered accounting policies and the long-term effect of each policy on a company’s bottom line. Accounting for such a large part of Total Assets (approximately 50%), the PPE account and its contra account, Accumulated Depreciation, affect both the Balance Sheet and the Income Statement of airline companies. Therefore, the method and assumptions a company implements relating to the calculation of depreciation can significantly alter the company’s financial appearance. Delta Airlines and Singapore both use the straight-line method to depreciate their airline equipment. However, the two companies assume different useful lives and salvage values, influencing the amount and timing of depreciation expense. Delta assumes longer useful lives than Singapore, increasing the life over time from 10 to 15 to 20 years in April 1993 (see Exhibit 1). A longer useful life spreads out depreciation over a longer period of time, therefore lowering the annual expense and increasing Net Income. Conversely, Delta is decreasing the residual value of PPE from 10% to 5% of cost. The increased depreciable base of Delta’s fleet paired with the extremely high useful life, Delta decreased their annual depreciation expense on every $100 of gross equipment from $9 in years prior to July 1986 to $4...
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...Delta Airlines Company Info and Overview: • Currently serves over 160 million customers/yr • Headquartered in Atlanta, Ga • Over 80,000 employees • Currently investing more than $2billion through 2013 in airport facilities and global products • Almost 5,000 daily flights with a current mainline fleet of 700+ aircraft • Current stock price $10.99/share with a market cap of 9.23B Singapore Airlines • • • • • Operates a fleet of over 100 airplanes 22,000+ employees Fly the most modern fleet and are the world’s largest operator of Boeing 747s Company has been profitable every year since 1948 Current share price $10.86 with a market cap of 12.98B Case Overview • • Delta and Singapore Airlines use base their depreciation methods on very different assumptions Entire airline industry struggling in the 1990s • • • • Competition from low cost carriers such as Southwest Iraq’s invasion of Kuwait and the corresponding oil crisis American recession From 1990-1993 the airline industry loses 12.8B and Delta is particularly hard hit. Singapore takes a hit as well but still manages to make 1.6B during the downturn Case Overview • • • • The average age of Delta’s aircraft was 8.8yrs at this time (low compared to its US competitors) while Sing air was operating the youngest fleet in the world 5.1yrs In 1993 Delta has approx. 412m more in total assets than Sing Air Delta is the 3rd largest carrier in the world and...
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...DEPRECIATION AT DELTA AIR LINES: THE “FRESH START” 1.- ¿Cuáles podrían ser las razones posibles por las que Delta Air Lines ha extendido la vida útil de su equipo de vuelo, así como también ha cambiado los valores residuales para propósitos de depreciación, durante cuatro veces desde 1986? "Por un lado, es necesario considerar el avance tecnológico. El uso de motores de turboventilador permitió disminuir el desgaste del equipo de vuelo y extender su vida útil. Por otra parte, los cambios en la industria -intensa competencia y desregulación- a partir de esta fecha pudieron haberles motivado a extender la vida útil y cambiar los valores residuales con el fin de reducir las cantidades anuales de depreciación, y así reportar un ingreso neto más alto o reducir pérdidas. Así puede reportar mejores estados financieros y acceder a otros instrumentos como financiamientos y créditos." 2.- Suponga que Delta Air Lines ha comprado los siguientes seis aviones: Para cada uno de los aviones calcule: a) El valor residual (de cada uno de los aviones en la tabla); b) La depreciación del primer año (de nuevo, para cada uno de los aviones de la tabla), considerando lo siguiente: De acuerdo a la información contenida en el caso, donde se dice que: "todas las principales aerolíneas de E.U. usan el método de apreciación de línea recta", se sigue este método para calcular la depreciación del...
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...changes all have influence over such decision. In the case for Delta Air Lines, the factors that lead to the extension of the economic live of their flight equipment and the change in the residual values can be attributed to corporate strategy, and technological change. In the earlier years, passenger planes were powered by piston engines. Piston engine powered aircraft are more susceptible to more wear and tear due to destructive vibration. Companies in the airline industry use ten years as the economic life of planes for their depreciation policy. As technology improves, planes evolved from piston engine powered to turbofan powered. Turbofan engines offers less wear and tear to the airframes of the plane, and their physical life was also longer. Planes became more efficient, and are able to operate for a longer period of time, and that was one of the reasons why Delta Air Lines extended its economic life and changed the residual values of its aircraft. Other factors could be due to corporate strategy and the pressure from the emerging discount airline that influences the company decision to change its economic life and residual value to reflect a more positive bottom line. In 2007, Delta Air Lines has just emerged from bankruptcy and the pressure to reflect a more positive financial statement is even greater. By extending the fleet of aircraft economic life and changing its residual value, depreciation cost of Delta Air Lines decreased by $127 million for the year ended December...
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...1) DELTA AIRLINE | PRIOR TO JULY 1, 1986 | JULY 1, 1986-MARCH 31, 1993 | MARCH 31, 1993- PRESENT | RESIDUAL VALUE | 10% | 10% | 5% | USEFUL LIFE | 10 years | 15 years | 20 years | Depreciation expense per $100 of gross aircraft value annually $100*10%= 10 Depreciation= (asset value- residual value)/ asset life $100-10=90/10 years= $9 per year PRIOR TO JULY 1ST, 1986 $100*10%=10 $100-$10= 90/15 years= $6 per year JULY 1ST, 1986 TO MARCH 31, 1993 $100*5%= 5 $100-$5= 95/20 years=$4.75 per year APRIL 1ST 1993 TO PRESENT SINGAPORE | PRIOR TO JULY 1, 1989 | AFTER APRIL 1ST, 1989 | RESIDUAL VALUE | 10% | 20% | USEFUL LIFE | 8 years | 10 years | $100*10%= 10 $100-10= $90/ 8 years= $11.25 per year PRIOR TO JULY 1ST, 1989 $100*20%= 20 $100-20= 80/10 years= $8 per year AFTER APRIL 1ST, 1989 2) Delta and Singapore both use straight line depreciation; what changes is the residual value percentage being higher for Singapore whereas the asset life period is higher for Delta. * New aircraft when added to the fleet, adds a longer asset life. * Also companies would depreciate aircraft using different depreciable lives and salvage values because management wants to get certain earning results. * Depreciation depends on the type of fleet since assets life varies * Usage and maintenance, for those aircrafts that have higher costs of maintenance and lower usage it is better to lower depreciation and increase usage. Treatment is proper according...
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...Depreciation Accounting 1 Types of Long-Lived Assets • Tangible asset • Asset with physical substance • Property, plant, and equipment = fixed asset. • Intangible asset • Intellectual property. • No physical substance • Examples are patent rights, copyrights 2 Amortization • View capital asset as bundle of services • Similar to prepaid expenses, cost is expensed as company benefits from the services • • • • Land - no depreciation Plant and equipment - depreciation Natural resources - depletion Intangible assets - amortization 3 Depreciation Methods • • Straight line method • (original cost - residual value) /service life Accelerated methods • Declining balance methods • Sum of the years’ or years’ digits methods 4 Declining Balance Method • Depreciation = book value * depreciation rate. • Double declining balance method = book value * 2 * straight line rate. • Straight line rate = 1/(life of asset in years). 5 Impaired Assets • • • An asset for which its remaining benefits, as measured by the sum of future cash flows the asset’s use will generate, is less than its book value If entity expects to hold asset • Write asset down to fair value If entity expects to sell asset • Write asset down to lower of cost or fair value less cost of disposal. 6 Group Depreciation n Group depreciation • Treats all similar assets as a “pool” or group rather than calculating for each item separately. • No gain or...
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...Depreciation at Delta and Singapore Airlines Case (Introduction) A question is asked, “What makes a business successful?” While this question can have many answers, the financial standing among of the businesses in comparison can make a strong argument. One way to tell how financially fit said business by looking at the net earnings Airline companies consider Property, Plant, and Equipment (PP&E) as a significant portion under the asset category on the balance sheet. 1. Calculate the annual depreciation expense that Delta and Singapore would record for each $100 gross value of aircraft. (a) For Delta, what was its annual depreciation expense (per $100 of gross aircraft value) prior to July 1, 1986; from July 1, 1986 through March 31, 1993; and from April 1, 1993 on? 1a. Pre- 1986: (100-10)/10 = 9 annual depreciation 1986-1993: (100-10)/15 = 6 annual depreciation 1993-beyond: (100-5)/20 = 4.75 annual depreciation (b) For Singapore, what was its annual depreciation expense (per $100 of gross aircraft value) prior to April 1, 1989; and from April 1, 1989 on? 1b. Pre-1989: (100-10)/8 = 11.25 annual depreciation 1989-on: (100-20)/10 = 8 annual depreciation 2. Are the differences in the ways that the two airlines account for depreciation expense significant? Why would companies depreciate aircraft using different depreciable lives and salvage values? What reasons could be given to support these differences? Is...
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...Singapore Airline & Delta Airline Introduction Property, Plant, and Equipment (PP&E) is a significant asset category of most airline companies. PP&E usually contains more than 50% of the total assets of an airline. The depreciation of these assets is a major operating expense. The proper depreciation of PP&E in companies, such as airline with PP&E being a significant part of their assets, plays an important role in their accounting strategies. The large variation in the way of determining the depreciation expenses affects a company’s financial results and tax consequence largely. Applying reasonable yet favorable depreciation methods and assumptions is essential to a sound accounting practice. In the below comparison of the depreciation methods and assumptions used by Delta Airline and Singapore Airline, one can see the means of making different assumptions for the best interest of each business. Annual depreciation expense (1) The two airlines Delta and Singapore use significantly different methods when accounting for the depreciation of their aircraft. Delta Airlines now uses a 20 year straight line depreciation method down to a 5% salvage value. This will spread out the expense of plane ownership over a longer time, lessening pressures on the balance sheet. The 5% salvage value represents what the airline can reasonably expect to liquidate the planes for. Singapore Airlines, on the other hand, uses a 10 year straight line depreciating method to account...
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...C1: MATLAB Codes t1=[37.79 39.51 38.54 39.14 39.02 39.4 39.01 37.18] t2=[22.4 22.07 22.15 21.72 21.75 22.55 22.18 21.92] T1=mean(t1) T2=mean(t2) V1=var(t1) V2=var(t2) S1=sqrt(V1) S2=sqrt(V2) MATLAB Answers T1=38.6988 T2=22.0925 V1=0.6718 V2=0.0859 S1=0.8196 S2=0.2931 C2: MATLAB Codes beta=0.98 alpha=1-0.98 z=icdf ('norm', alpha/2, 0, 1) hatmu=mean(t1); hatmu=mean(t2) s=std(t1); s=std(t2) n=length (t1); n=length (t2) margin=z*s/sqrt(8) MATLAB Answers alpha=0.02 z=2.3263 margin(t1)=0.6741; margin(t2)=0.2931 C3: MATLAB Codes syms l s b T1 T2 l=0.0496; s=1.00; b=10; T1=0.0386988; T2=0.0220925; g=((l^2)/(2*s*sind(b)))*((1/T2^2)-(1/T1^2)) MATLAB Answers g=9.7835 C4: MATLAB Codes for Partial Derivatives g=((l^2)/(2*s*sin(b)))*((1/T2^2)-(1/T1^2)) gl=diff(g,l) gs=diff(g,s) gb=diff(g,b) gT1=diff(g,T1) gT2=diff(g,T2) MATLAB Answers for Partial Derivatives gl=-(l*(1/T1^2 - 1/T2^2))/(s*sin(b)) gs=(l^2*(1/T1^2 - 1/T2^2))/(2*s^2*sin(b)) gb=(l^2*cos(b)*(1/T1^2 - 1/T2^2))/(2*s*sin(b)^2) gT1=l^2/(T1^3*s*sin(b)) gT2=-l^2/(T2^3*s*sin(b)) MATLAB Codes for Partial Derivative Values gl0=subs(gl,[l s b T1 T2],[l0 s0 b0 T10 T20]) gs0=subs(gs,[l s b T1 T2],[l0 s0 b0 T10 T20]) gb0=subs(gb,[l s b T1 T2],[l0 s0 b0 T10 T20]) gT10=subs(gT1,[l s b T1 T2],[l0 s0 b0 T10 T20]) gT20=subs(gT2,[l s b T1 T2],[l0 s0 b0 T10 T20]) MATLAB Answers for Partial Derivative Values gl0= -125.9202 gs0=...
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...Depreciation at Delta & Singapore Airlines 1. a. Delta Airlines | Prior to | Between July 1, 1986 | April 1,1993 | | July 1, 1986 | & March 31, 1993 | Forward | | | | | Fixed Price $100 | | | | | | | | Residual Value | 10% | 10% | 5% | Asset Life | 10 | 15 | 20 | Depreciation | $9 | $6 | $4.75 | Calculation | (100-10/10) | (100-10/15) | (100-5/20) | b. Singapore Airlines | Prior to | April 1,1989 | | April 1, 1989 | Forward | | | | Fixed Price $100 | | | | | | Residual Value | 10% | 20% | Asset Life | 8 | 10 | Depreciation | $11.25 | $8.00 | Calculation | (100-10/8) | (100-20/10) | 2. Delta & Singapore Airlines both use the straight line depreciation method. The salvage values and asset lives used by both companies differ. Delta uses a higher average asset life than Singapore, but their residual value is less than Singapore’s. This is done because airlines use different types of fleet’s. Once newer technology was introduced, airlines claimed that they could operate a new fleet of aircraft for a longer period of time thus depreciation was over a longer period of time also. The older planes required less usage but higher maintenance costs, so airlines may want to increase its average usage period creating a lower depreciation rate. This would allow the airlines to show a greater net profit due to the decline in depreciation expense. 3. Delta Depr. Year |...
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...1. Alpha Corporation hires a subject matter expert at a salary of Rs 5,000 per month including benefits. The subject matter expert is non-billable and is expected to help engineers with resolving their technical queries as well as assist them in development of new technology. The subject matter expert was hired on 1st of February and today is 1st of March of the same year. You have just paid him his salary. What accounts will this transaction impact? 1. Expense Account will be affected and Cash account will be affected. |Salary (E) | 5,000 | |Cash (A) |-5,000 | 2. Bravo Corporation borrows Rs 1,000,000 on 1st Jan 2013 from a bank for corporate expenses. As per the terms of the agreement, Bravo Corporation will need to pay the bank $1,728,000 at the end of three years. Today is 1st of Jan 2014 and Bravo Corporation is preparing its Income Statement. What will be the value of Interest Expense that figures in the Income Statement? Compund INTEREST!!!!!! 1st JAN 2013 Balance sheet: We did not do in 1st, as there was no income or Expense. |Source of Funds | | | | | | |Shareholders’ Equity | | |EQ | | |Debt |1,000,0000 | |L | | | | ...
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...in the Income Statement? Ans: Bravo Corporation. Income statement (1st Jan to 31st Dec 2013) Interest expense 242666.66 3.Charlie Corporation is in the business of development of software and as a result most of its engineers use PCs provided by the company for their work. During the past year, it sold 2 old PCs and bought 3 new PCs for its engineers. Each old PC sold was Rs 1000 and each new PC was bought for Rs 2000. The PCs were sold for cash and were purchased for cash. Owing to this transaction, how much should Charlie Corporation’s Fixed Asset account change for this year? You may ignore depreciation. Ans: The fixed asset account would change by 4000 4.The financial year has just ended for Delta Corporation and for the current financial year, Delta just announced that it would pay out a...
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...Depreciation Depreciation is a non-cash expense which reduces the value of a fixed asset except Land as a result of wear and tear, age, or obsolescence. Most assets lose their value over time (in other words, they depreciate), and must be replaced once the end of their useful or economic life is reached. There are several accounting methods that are used in order to write off an asset's depreciation cost over the period of its useful life because it is a non-cash expense, depreciation lowers the company's reported earnings while increasing free cash flow. In a simple word depreciation is all about the reduction in the value of fixed assets and the allocation of the cost of assets to periods in which the assets are used. While depreciation expense is recorded on the income statement of a business, its impact is generally recorded in a separate account and disclosed on the balance sheet as accumulated depreciation, under fixed assets, according to most accounting principles. Without an accumulated depreciation account on the balance sheet, depreciation expense is usually charged against the relevant asset directly. The values of the fixed assets stated on the balance sheet will decline, even if the business has not invested in or disposed of any assets. The amounts will roughly approximate fair value. Otherwise, depreciation expense is charged against accumulated depreciation. Showing accumulated depreciation separately on the balance sheet has the effect of preserving...
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..._______ 1. For a business, the advantage of offering credit to customers is that it: A. increases the amount of sales. B. increases cash flow from financing activities. C. decreases cost of goods sold. D. decreases the amount of inventory the company needs to carry. _______ 2. The net realizable value of accounts receivable is calculated, A. Accounts Receivable + Uncollectible Accounts Expense B. Accounts Receivable + Notes Receivable C. Accounts Receivable - Allowance for Doubtful Accounts D. 365/Accounts Receivable _______ 3. To estimate the amount of its uncollectible accounts receivable, a company might A. consult industry publications. B. look at its past history of uncollectible accounts. C. take into account the current condition of the economy. D. all of these. _______ 4. Which of the following is not an advantage of accepting credit cards from retail customers? A. The acceptance of credit cards tends to increase sales. B. There are fees charged for the privilege of accepting credit cards. C. The credit card company performs credit worthiness assessments. D. The credit card company assumes the cost of slow collections and write-offs. _______ 5. The accounting records of the Schaller Company and Quimby Company contained the following account balances: [pic] Select the true statement from the following options: A. The accounts receivable for Schaller Company turned over 6 times per year. B. The company with the higher...
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...As we analyze the probability of Southwest, we took more considerations on the ROA instead of ROE. Since Delta has the negative balance for equity, it is not consistent to compare ROE among these four companies. The ROA ratio for Southwest is quite lower than the other three peer companies. Thus, we disaggregated the ROA ratio to two parts: Profit Margin and Asset Turnover. When we further comparing these two ratios, we found that the Asset Turnover rates of Southwest are in the middle range among all these four companies. However, the Profit Margin Ratios are low compared to its peers. The Comparative Income statement of Southwest shows that it has high sales revenue but it also has relative low net income among the peer groups. It is because Southwest has high expenditures on SG&A, depreciation, depletion and amortization, which are dragging down the net income of Southwest. Furthermore, we analyze the operating income profitability by comparing the RNOA( return on net operating asset), NOPM( net operating profit margin) and NOAT( net operating asset turnover) among these four companies. Southwest has an extremely low RNOA rate compared to its peers. As shown in the exhibit 3a, southwest has a much higher P/E ratio among the peer group. Also as shown in exhibit 3b, Southwest has the highest Net PPE compared to its peers. Southwest’s high PPE increase the Net operating Asset as well as decrease its RNOA ratio. We disaggregated the RNOA to NOPM and NOAT. As we previous mentioned...
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