Singapore and Delta Airlines Discussion Essay

866 Words 4 Pages
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
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In contrast, Delta was concerned with costs, and held onto their planes for longer. Thus they had a longer depreciation period and a lower salvage value. It’s obvious that they used their airplanes differently, thus we believe the treatment of salvage value and useful life is proper.

3. Assuming the average value of flight equipment that Delta had in 1993, how much of a difference do the depreciation assumptions it adopted on April 1, 1993 make? How much more or less will its annual depreciation expense be compared to what it would be were it using Singapore’s depreciation assumptions?

Based on exhibit 2, original book value for all flight equipment was 9.043 billion dollars in 1993 and 8.354 billion dollars in 1992. Flight equipment under lease for each year was $173M. Taking the average value from the combined two years we get $8.872B [(9.043+0.173+8.354+0.173)/2=$8.8715B].

To get their anticipated depreciation after the new depreciation assumptions adopted in April 1, 1993, we take the new depreciation expense of 0.0475 ($4.75 for $100 gross expense) and the old depreciation expense of 0.06 (6$. for $100 gross expense). The total difference in the depreciation assumptions is an astounding $111M (8872 * (0.06-0.0475) = $110.89M).

When comparing the difference of the depreciation expense by using the Singapore Airline’s depreciation assumptions we find the expense nearly triple to a total of $288M (8872 * (0.08-0.0475) = $288.34M).

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