Q1.

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 $100 of gross
aircraft value) prior to !ul" 1 1#$%& fro' !ul" 1 1#$% through (arch )1 1##)&
and fro' *pril 1 1##) on+
(,) For Singapore what was its annual depreciation expense (per $100 of gross
aircraft value) prior to *pril 1 1#$#& and fro' *pril1 1#$# on+
*ns. Delta *irlines alwa"s followed a Straight -ine depreciation polic". So annual
depreciation expense for $100 value of gross aircraft is given as
Depreciation expense . (Cost / 0esidual 1alue)2*sset -ife
(i) 3rior to !ul" 11#$%
0esidual 1alue . 104 of Cost *sset -ife . 10 "ears
Depreciation 5xpense . ($1006$10)210 . $9
(ii) Fro' !ul" 1 1#$% through (arch )1 1##)
0esidual 1alue . 104 of Cost *sset -ife . 17 "ears
Depreciation 5xpense . ($1006$10)217 . $6
(iii) Fro' *pril 1 1##) onwards
0esidual 1alue . 74 of Cost *sset -ife . 80 "ears
Depreciation 5xpense . ($1006$7)280 . $4.75
(,) Singapore *irlines also followed the Straight -ine depreciation 'ethod and thus
the sa'e for'ula can ,e used here also
(i) 3rior to *pril 11#$#
0esidual 1alue . 104 of Cost *sset -ife . $ "ears
Depreciation 5xpense . ($1006$10)2$ . $11.25
(ii) Fro' *pril 1 1#$#
0esidual 1alue . 804 of Cost *sset -ife . 10 "ears
Depreciation 5xpense . ($1006$80)210 . $8
Q8. *re the differences in the wa"s that the two airlines account for depreciation
expense significant+ 9h" would co'panies depreciate aircraft using different
deprecia,le lives and salvage values+ 9hat reasons could ,e given to support these
differences+ :s different treat'ent proper+
*ns. 5ven though ,oth airlines follow the Straight -ine 'ethod there is a significant
difference in the salvage value (74 for Delta and 804 for Singapore) as well as the
deprecia,le life (80 "ears for Delta and 10 "ears for Singapore) so we can sa" that
there is a significant difference in the wa"s that these two airlines account for
depreciation.
Different airlines have different needs and 'ethods of operation. ;ased on this the"
will depreciate their aircraft using different deprecia,le lives and salvage values.
:n the current case Delta *irlines was suffering fro' huge losses in 1##) and thus
the" wanted to reduce their expenses as 'uch as possi,le. <he depreciation
expense could ,e reduced considera,l" ," increasing the asset life of the aircraft
which is exactl" what the" did. =n the other hand Singapore *irlines was in good
econo'ic health and could afford higher depreciation expense.
:t is also possi,le that Singapore *irlines want to resell their aircraft and thus had a
shorter asset life while Delta *irlines plan to use their aircraft for a longer period and
then discard the'.
9e should also note that Singapore *irlines has a higher capacit" utili>ation rate
(?1.)4) and average 'iles per passenger (8?80 'iles) as co'pared to Delta
*irlines (%8.)4 and #%# 'iles). Due to the higher utili>ation Singapore *irlines
'ight have ta@en a lower asset life.
*s long as the co'panies follow the accounting standards the different treat'ent is
proper ,ecause the deprecia,le life and salvage value differ for each co'pan"
,ased on its needs and operation policies.

Q). *ssu'ing the average value of flight eAuip'ent that Delta had in 1##) how
'uch of a difference do the depreciation assu'ptions it adopted on *pril 1 1##)
'a@e+ Bow 'uch 'ore or less will its annual depreciation expense ,e co'pared to
what it would ,e was it using SingaporeCs depreciation assu'ptions+
*ns. *verage value of flight eAuip'ent owned ," Delta in 1##) isD
($#0E) F $$)7E)28 F $1?) . $$$?8 'illion
Difference due to new depreciation expensesD
$$$?8G($% 6 $E.?7)2$100 . $111 'illion
DeltaCs depreciation expense is less than what would ,e ," SingaporeCs 'ethod ,"
a'ountD
$$$?8G($$ 6 $E.?7)2$100 . $8$$.E 'illion
QE. Singapore *irlines 'aintains depreciation assu'ptions that are ver" different
fro' DeltaCs. 9hat does it gain or lose ," doing so+ Bow does this relate to the
co'pan"Cs overall strateg"+
*ns. Singapore *irlines is currentl" 'a@ing good profits so it can afford to have high
depreciation expenses. :t stands to gain that in the future it can show 'uch less
depreciation expense. *lso it will have a 'uch depreciated asset later which it can
sell to 'a@e larger profits at a later stage. <he co'pan" can also save on taxes ,"
showing higher expenses. <he loss of doing so is that the co'pan" will show lower
net revenue and the profit will also decrease as a result.
<he co'pan"Cs overall strateg" involves selling used aircraft at relativel" higher
prices after using the' for a shorter period. <his is supported ," 5xhi,its 1 and 7 of
the case which show DeltaCs annual ,oo@ gain on the sale of flight eAuip'ent during
1#$#61##) was a,out $)0 'illion whereas SingaporeCs average annual ,oo@ gain
on the sale of flight eAuip'ent was $?E 'illion (after adHusting exchange rate). *s a
result the co'pan" can ,u" new aircraft regularl". <he average age of aircraft for
Singapore *irlines is onl" 7.1 "ears as co'pared to $.$ "ears for Delta. 3urchasing
new aircraft li@e the ;oeing (5I*<=3 ?E?6E00 regularl" helps Singapore *irlines in
providing ,etter custo'er satisfaction. 5xhi,its ) and ? show that while Delta has no
(5I*<=3s Singapore *irlines has 1$ of the'. Due to these reasons Singapore
*irlines follows a different strateg" than DeltaCs.
Q7. Does the difference in the average age of DeltaCs and SingaporeCs aircraft fleets
have an" i'pact on the a'ount of depreciation expense that the" record+ :f so how
'uch+
*ns. Jo the difference in the average age of DeltaCs ($.$ "ears) and SingaporeCs
(7.1 "ears) aircraft does not have an" i'pact on the a'ount of depreciation expense
the" record. <his is ,ecause the" ,oth use the straight line 'ethod for recording
depreciation and in this 'ethod the depreciation expense is dependent onl" on the
initial cost salvage value and the deprecia,le life of the asset and not on the current
age of the asset. Bowever we should ta@e care not to depreciate an asset after its
deprecia,le life is over.