The "Fresh Start" 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.
Depreciation at Delta and Singapore Airlines Essay - Paper Example Depreciation at Delta and Singapore Airlines Essay Introduction Depreciation expense is the way that the use of an asset is matched with the revenue that is generated from the asset on the income statement during the time period being reported - Depreciation at Delta and Singapore Airlines Essay introduction.
There are several different methods of depreciating an asset: This case study will evaluate the differences in their rates of depreciation and the impact on their operating income and profitability before and after they changed their methodology and depreciation assumptions in their policy.
Why would companies depreciate aircraft using different depreciable lives and salvage values? What reasons could be given to support these differences? Is different treatment proper? Both Delta and Singapore airlines use the same straight-line depreciation method to account for their depreciation expense.
However, the assumptions they use for the depreciation lives and salvage values are different. Oftentimes companies prefer to use different salvage values and depreciation lives when recording their depreciation expense because of the policies of their airlines or due to managerial decision-making.
Singapore prefers to pay less in taxes so they can decrease their profit by recording their depreciation expense within a short period. They benefit from following this policy, especially since their net profit is sufficient. Since there are no explicit or mandatory rules governing the treatment of depreciation, each company can decide which method they prefer for their company.
Therefore, different treatment is proper as long as they follow the policy in place by their company.
Question Three — Assuming the average value of flight equipment that Delta had inhow much of a difference do the depreciation assumptions it dopted on April 1, make? What does it gain or lose by doing so? Singapore maintains one of the youngest average fleet ages in the industry at 5. The company is majority-owned by the Singapore government, but did not receive any subsidy from the government.
Its stock is, however, followed by over 20 investment analysts worldwide. Staff bonuses were cut from 3. The other issue that that was hurting their profitability was that their strategy was not in line with their utilization rate of only They should have been focusing on the amount of depreciation they were paying expensing as a percent of operating expense much sooner.
With profits and utilization rates declining constantly over the last five years, a focus on the depreciation methods could have helped them reduce the decline in net profits. In order to reduce expenses and increase net income they needed to make a change in the way they were depreciating their fleet.
If they continue to purchase new aircraft, they needed to come up with a new depreciation method or incur higher depreciation expenses as they bring on newer planes that will add more to the depreciation base of the current fleet.
If so, how much? The amount of depreciation left for each fleet would be impacted depending on how many of the older planes haves been fully depreciated, but not the average amount per year.
Conclusion Changing the assumptions in their corporate depreciation policy can have a significant impact on the net income of the company.
For any company, whether it is in the airline industry or manufacturing industry, managing earnings is very important to the shareholders and also to the management team and other employees who are on bonus plans.
A significant increase in assets can raise the depreciation expense in any one year enough to reduce the net income from the previous year to a net loss the next year.
Choose Type of service.Depreciation at Delta and Singapore Airlines Introduction Depreciation expense is the way that the use of an asset is matched with the revenue that is generated from the asset on the income statement during the time period being reported - Depreciation at Delta and Singapore Airlines introduction.
Financial Accounting Depreciation at Delta Airlines & Singapore Airlines (Solution to Case #2) 24th November, 1. Calculate the annual depreciation expense that Delta and Singapore would record for each $ gross value of aircraft. Depreciation at Delta Air Lines and Singapore Airlines (B) case analysis, Depreciation at Delta Air Lines and Singapore Airlines (B) case study solution, Depreciation at Delta Air Lines and Singapore Airlines (B) xls file, Depreciation at Delta Air Lines and Singapore Airlines (B) excel file, Subjects Covered Accounting policies Accounting procedures Financial statements by William J.
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Case Study – Depreciation at Delta Airlines and Singapore Airlines Objectives To understand the different depreciation methods used by Delta Airlines and Singapore Airlines during the .
Depreciation at Delta Air Lines and Singapore Airlines (A) case study solution, Depreciation at Delta Air Lines and Singapore Airlines (A) case study analysis, Subjects Covered Accounting policies Accounting procedures Financial statements by William J.
Bruns Jr., Jeremy Cott Source: HBS Premier Case Collection