...Question 1 (i) Delta Air Lines need to update the residual value and depreciation of their aircraft over time in order to calculate the life of the aircraft. The calculation requires estimation and assumptions such as the long-term of usage, maintenance cost, residual value and economic conditions which need constant review. Technological changes in the industry are one of the reasons why Delta Air Lines decided to extend the useful lives of their flight equipment. Technological advances such as changing engines from pistons to jet engines allow aircrafts to function more efficiently with less wear and tear on the airframes and for longer period of times. With consistently updated with latest technology, aircraft are better maintained and can simply last much longer. In addition, Delta Air Lines decision to change in depreciation since 1986 had a positive impact on the company’s financial statements. Depreciation is a non-cash item which does not affect cash flows or revenue. However, it does have an effect on the net income. By stretching out depreciation, Delta will see a decrease in depreciation expense resulting in higher net income. This is crucial for not only for Delta Air Lines, but to all airlines companies as well as intense competition and deregulation in the industry were being pressured to show more profits and results. The disadvantage to decreasing in depreciation is taxes. With decreased depreciation and increased net income, Delta Air Lines’ income...
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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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...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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...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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...STUDY SECOND SEMESTER FEBRUARY 2015/2016 (A152) GROUP: B (5) WRITTEN REPORT CASE ANALYSIS CASE : Depreciation at Delta Air Lines: The “Fresh Start” PREPARED FOR: PROF. DR. MOHAMAD ALI B ABDUL HAMID PREPARED BY: NAME | MATRIC NO | AHMAD SHABIRIN BIN BAHRIN | 221521 | YELMI MARIANI BINTI ZULKIFLI | 221792 | LEONG SIAO ZHUEN | 230190 | NIWASHINI A/P SUBRAMANIAM | 230293 | ANG HUI QIN | 230294 | EXECUTIVE SUMMARY Delta Airline began 2008 with more worldwide destination of 321 destinations in 58 countries. In 2008 merged with Northwest Airlines, become the largest airline in the world. In May 1st 2007, Delta adopted policies regarding estimated lives & residual values for aircraft, but its was far from the 1st time it had changed its estimates. PPE (flight, ground property) are often more than half of the total asset. Depreciation of those asset is a major operating expenses and is not an attempt to measure the current value of assets. The amount of depreciation estimated by an airline company for each operating period is based in the cost of asset, estimates of asset lives, and assumptions about residual values at the end of the asset lives. These estimates & assumptions have changed through the years for almost all airlines. Depreciation practices had been change several time. CAUSE AND STATEMTN OF PROBLEM Delta, has changed assumptions of economic life of aircraft 4 times since 1986, each time extending the expected life...
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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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...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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...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 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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...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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...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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...Affairs This portion of the paper will include key information about Delta Air Lines, Inc. (Delta): (a) history; (b) culture; (c) important leaders over the years; (d) current products and service offerings: (e) target markets; and (f) methods of product and service delivery. History This section describes the history of Delta. The company was founded in Macon, Georgia, in 1924, as the world’s first crop-dusting service, Huff-Daland Dusters. The company moved to Monroe, Louisiana, in 1925. In 1928, field manager C. E. Woolman and two partners purchased the service and renamed it Delta Air Service after the Mississippi Delta region it served. Delta was the first international mail and passenger route on the west coast of South America. Delta operated its first passenger flights over route stretching from Dallas, Texas to Jackson, Mississippi, via Shreveport and Monroe, Louisiana. Also, Delta was awarded a US Postal Service contract in 1934 to fly from Fort Worth to Charleston via Atlanta (Hoover’s, 2011). In 1941, Delta relocated to Atlanta. Woolman became the president in 1945 and he managed the company until his death in 1966 (Delta, 2011). Delta offered its first night service in 1935, using the Stinson Model A; the first Delta aircraft with two pilots. Douglas DC-2 and DC-3 service was introduced and the introduction of flight attendants, called “stewardesses,” added to flight crews. Delta contributed to the war effort by modifying 1,000 plus aircraft, over-hauling...
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...Chapter 6 5 Delta Corporation purchased 3 assets during the current year: an automobile costing $60,000, office furniture $260,000 and a warehouse costing $750,000. Which assets should Delta elect Section 179 expensing for and why? It should expense the $206,000 in furniture. The amount for the automobiles is over the limitation of $11,060. The warehouse is not eligible. 8 Why would a business elect to use the ADS straight-line method to compute regular income tax depreciation rather than the 200 percent declining-balance method allowed under MACRS Reasons to elect to use ADS straight-line: taxpayer is in low tax bracket but expects to be in higher bracket in the future, at a point near AMT, net operating loss in the current year there is no benefit from increased deduction for regular tax depreciation. 16 Two years ago, Warren purchased a computer for $4,000. Until this year, he used it exclusively for personal purposes. At the beginning of the current year, Warren opened a consulting business and began using the computer solely for business purposes. At the time he began his business, Warren’s computer was worth $600. What basis must Warren use in calculating his depreciation on the computer? The fair market value, $600 at the date the asset started being used for his consulting business. 57 Jerry is considering purchasing a new hybrid automobile, such as a Ford Fusion Hybrid because he is attracted by the high fuel efficiency. When he started looking at new...
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