On January 1, 2017, Best Shipping Transportation Company purchased a used aircraft at a cost of $ 48 comma 700 comma 000. Best Shipping expects the plane to remain useful for five years (7 comma 300 comma 000 miles) and to have a residual value of $ 4 comma 700 comma 000. Best Shipping expects to fly the plane 925 comma 000 miles the first year, 1 comma 200 comma 000 miles each year during the second, third, and fourth years, and 2 comma 775 comma 000 miles the last year. Requirements Compute Best Shipping's depreciation for the first two years on the plane a. Straight-line method Using the straight-line method, depreciation is $ for 2017 and $ for 2018. b. Units-of-production method (Round the depreciation per unit of output to two decimal places to compute your final answers.) Using the units-of-production method, depreciation is $ for 2017 and $ for 2018. c. Double-declining balance method Using the double-declining-balance method, depreciation is $ for 2017 and $ for 2018.

Answer and Explanation:

The computation of the depreciation expense for the first year and the second year is shown below:

a) Straight-line method:

= (Original cost - residual value) ÷ (useful life)

= ($48,700,000  - $4,700,000) ÷ (5 years)

= ($44,000,000) ÷ (5 years)  

= $8,800,000

In this method, the depreciation is the same for all the remaining useful life

So for the 2017 and 2018 the depreciation of $8,800,000 is separately charged

(b) Units-of-production method:

= (Original cost - residual value) ÷ (estimated production)  

= ($48,700,000  - $4,700,000) ÷ ($7,300,000 miles)

= ($44,000,000) ÷ ($7,300,000 miles)  

= $6.02 per miles

Now for the 2017, it would be  

= Miles in first year × depreciation per miles

= 925,000 miles × $6.02

= $5,568,500

And for the 2018, it is

= Miles in second year × depreciation per miles

= 1,200,000 miles × $6.02

= $7,224,000

(b) Double-declining balance method:

First we have to find the depreciation rate which is shown below:

= One ÷ useful life

= 1 ÷ 5

= 20%

Now the rate is double So, 40%

In year 2017, the original cost is $48,700,000, so the depreciation is $19,480,000 after applying the 40% depreciation rate

And, in year 2018, the ($48,700,000 - $19,480,000) × 40% =  $11,688,000

the answer is a.

by: nicholas dooley