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ABSTRACT This case study examined the depreciation accounting policies of two airway companies namely Aviator and Eagle for the year end of June 2012 and March 2012, respectively. The depreciation expense varies for both companies considering the useful life and residual value estimate. The results of this case study have indicated that the Eagle aviation company has earned a higher net profit compared to the net profit earned by the Aviator aviation company. CONCEPT MAP

Discussion on the Concept Map Derived: Based from our understanding, we have understood that airline companies in particular do have group assets. These group assets comprise of the real properties, manufacturing plants, equipments, aircrafts, spares, and spares engines. These components of the general assets are governed with depreciation and amortisation rules and policies which will help in determining the useful life and residual life of the assets. Basically, when we refer to the useful life, it is the time being where the assets are in use or useful for the company. On the other hand, when we say residual life, it refers to the value of the asset after it has been used or in other words when the said asset is no longer used by the company. Eventually right after, computations are made considering the different depreciation policies, the net profit of the company may be determined. COMPARISON OF THE DEPRECIATION ACCOUNTING POLICIES OF AVIATOR AND EAGLE The Aviator and Eagle aviation companies offer the same services and operate both in the domestic and international aviation

industry. Both companies consider their aircrafts, spares, and spare engines jointly comprise the major assets of the companies. As for the Aviator Company they observe a depreciation and amortisation policy on a straight-line basis on all its assets except for freehold and leasehold lands. The calculation of depreciation and amortisation of owned assets focuses on the cost minus the estimated residual value, over the assets estimated useful life to company. The main difference between the Aviator Company and Eagle Company, the former observes that its assets are amortised from the date of acquisition with a consideration to the internal assets, from the time an asset is completed and ready for use. While the Eagle Company calculation of depreciation and amortisation focuses to write-down their cost to their estimated residual values until it reaches the end of its operational life span. The Eagle Company annually reviews its operational and residual lives since they consider the possible factors that the assets may experience which will lead to possible changes of circumstances. The said company also retain fully depreciated assets until they are no longer used by the company. In light of the said difference, it has indicated that the Aviator and Eagle companies vary on their policies, which greatly affect their computations in terms of accumulated depreciation and written-down value. COMPUTATION A. ESTIMATE COMPUTATION OF DEPRECIATION EXPENSE FOR 2012 FINANCIAL YEAR Since both companies observe the Straight Line Depreciation Method, this formula will be observed: SL=Cost/Life Aviator Company:

Cost of Aircraft and Engines: $13358.90; Life = 20 years 13358.90/20=$667.945 The annual depreciation of aircraft and engines for 20 years is $667.945. Cost for Spare Parts: $ 750.7; Life 15-20 years Considering the 15 years and 20 years respectively: 750.7/15 = $50.04 annual depreciation of spare parts for 15 years 750.7/20 = $37.53 annual depreciation of spare parts for 20 years Eagle Company: Cost of Aircraft and Engines: $17718.10; Life = 20 years 17718.10/20=$885.91 The annual depreciation of aircraft and engines for 20 years is $885.91. Cost for Spare Parts: $ 1306.10; Life 15-20 years Considering the 15 years and 20 years respectively: 1306.10/15 = $87.07 annual depreciation of spare parts for 15 years 1306.10/20 = $65.31 annual depreciation of spare parts for 20 years B. ESTIMATE COMPUTATION OF DEPRECIATION EXPENSE APPLYING USEFUL LIFE AND RESIDUAL VALUE ESTIMATE

Using the useful life and residual value, this is the straight line method formula: Depreciation per year = (Cost-Residual Value)/Useful Life Aviator Company: Aircraft and Engines specifically new aircrafts, 15 years and 10% residual value Depreciation per year = (13,358.90-1335.89)/15 Depreciation per year = $801.53 C. COMPARATIVE ANALYSIS OF FINDINGS Based from the computation made, there is a difference with the depreciation values obtained from the two methods. Basically from the first method using the straight line method, which uses the cost and divided by the life, the annual depreciation value is much smaller compared to that with the formula using the useful life and residual value. The deficiency value obtained from the formula with the values using the useful life and residual value has obtained a higher depreciation annual value which, in my analysis is far more accurate compared to that of the first formula. Considering that the depreciation value is higher when using the useful life value and residual value, this will enable the company to give a wider scenario as to how the company has to lose and what it has to be done in order to answer such problem. It is accurate because the residual value, gives the asset a certain cost that will still give the said asset the cost that will somehow allow the asset to be competitive in the market. It does not wait for the wear and tear time to come. It is also good to

have included the expected useful years, in order for the company to have the ample amount of time to consider in making use of the said asset and allow the latter to give a higher return to the company. COMPARISON OF DEPRECIATION POLICY FROM OTHER AIRCRAFT COMPANY Based from the case study conducted by Pangaria and Singh on 2009, they had studied on the depreciation policies and methods of Delta Airlines and Singapore Airlines. As per study, both airline companies are using the Straight Line Method of Description which is the same with the two airline companies described in this case study, Aviator Company and the Eagle Company. The depreciation methods as identified in the case study of Delta Airlines and Singapore Airlines, depreciation methods were dependent on the technological advancements of the aircraft industry, and maintenance factors. Delta Airlines though had observed some changes of their depreciation methods between the period of 1989 and 1993 which made an increase in their useful life of the aircrafts and reduced the residual values. According to the Center for Financial Research and Analysis, Inc. Or CFRA, the aircrafts depreciation outlay is based firstly in the useful life and residual value of the aircraft. This is also known to be the expected market value of the said aircraft on the estimated time where the end of its useful life comes. Based from the periodic depreciation cost, the aircrafts value eventually decreases while its operational expenses increase, thus, resulting to the depreciation of the aircrafts value. In increasing the estimated residual cost of the aircraft and at the same time increasing the useful life of the aircraft

would definitely result to the airline companys lowering of depreciation cost on its income statement and in effect gives a higher value to its aircrafts. There were also identified airline companies that remain with their depreciation policies. For instance, the Alaska Airgroup Incorporated where it observes the policy at eight to twenty year for every aircraft. As for the Northwest Airlines Corporation, it observes a depreciation policy at a period of 25 years only no more no less. The Trans World Airlines Inc. Maintained their depreciation policy of two years where they observe the sixteen to thirty years of useful life. And lastly the US Airway Group Inc, where it is known to be a conservative company and observes a useful life of eleven to twenty years. However this does not apply in all cases. It basically depends on the status of the aircraft company especially on its services. Just like in the case of the Aviator airline company where it serves more domestic destinations or travel and fewer international flights. SIGNIFICANCE OF DEPRECIATION POLICY Companies whether it is an airline company or any other type of company has its own assets. It is either that the said assets appreciate or depreciate in worth. When the value of the asset increases through time, for example a real estate property, it is understood to be appreciation. On the other hand, if the value of an asset decreases through time or the projected end of use, it is known to be depreciation. Examples of assets that depreciates we have the aircrafts as stated in this case study, used vehicles, equipments, machineries, and others. When the assets are evaluated in terms of its value whether annually or periodically, the process or method refers to depreciating policy or depreciating method. The depreciation policy is significant especially in companies

since it will enable to give the company enough information in terms of the value of its asset. If the assets do not undergo any depreciation evaluation, chances are, the company will own assets that could be low in value which will eventually affect their profits. The depreciation policy is very useful and important especially in cases where the assets come to a point of wearing and tearing. When the asset comes to a point where it has a higher cost in terms of maintenance cost, it reduces it residual value thus affecting the possible chances for the company to come up with an income statement with a high depreciation cost. Having a constant monitoring of the depreciation value, allows the company to identify and show its accurate asset value every year.

REFLECTED NOTES 1. Based from the case undertaken between the Aviary and Eagle Airline Company, it has given me the insights how significant it is for every company to observe proper depreciation policies and methods. This is specifically true with the airline companies where the aircrafts and its spare engines require proper maintenance and operational costs. Therefore it is imperative that these assets will undergo depreciation methods in order to come up with the proper measures that the company has to adopt especially after identifying the residual

value of the equipment. In my own reflection, I come to realize that when we invest to things that can be easily replaced, such as cellular phones, cars, and others, we need to consider whether the act of buying those things is a smart move, considering that the said items will eventually depreciate. This is true, especially nowadays, that the technology is fast upgrading and changing. This will eventually result to rapid depreciation of your asset. In lieu to this, we need to be wise enough especially in buying the things that we wish to have and considering its usefulness and the residual value. 2. The case study has enlightened me especially the importance of

knowing value of the assets. I come to realize that, assets or things that a company may possess or even individuals possess need to undergo a depreciation method of evaluation. It is one way of checking whether the said assets will still have its strong value or not. Through this I will be able to think on what are the actions that have to be made. Actions refer to whether you will keep the asset or dispose it. I also thought that buying items that would depreciate is not a good move. This is especially true if a person is fond of purchasing items that are not essential and items that easily wear and tear. For the companies, it is therefore important for them, in my own reflection that they need to purchase equipments that are durable and has a lot of features relevant to the needs of the company. To assess the appreciation and depreciation of the companys assets, I therefore say that it has to be done and observed properly. It has to observe the necessary depreciation policies and at the same time to put into consideration the current situation of the company also. 3. This is the first time that I come to encounter and understand the

relevance of having a depreciation policy or method in assessing the value of an asset in a company. In light of this, I come to understand why certain airline companies will decide on selling their aircrafts even though it is still in good condition and can still be further used. I just then realized the value of knowing the residual value since this will guide you as to when you need to possibly dispose the item that can still be reasonably bought with a good cost and good condition. This is also true to those who are selling cars. Even though the cars are not yet out-modelled and still in very good condition, but the owners were considering the cost of maintenance and the wear and tear aspect. The owners are not waiting for the asset or car to be in a poor condition but when they decided to sell it, it is still in a very good condition. These certainly have enlightened me and make me understand the value of having the depreciation policies and methods.

BIBLIOGRAPHY Center for Financial Research and Analysis, Inc. 1999 <www.public.asu.edu> Capitalization Policy and Depreciation Policy for Capital Assets <www.suny.edu/sunypp/documents.cfm> Depreciation Accounting Contents<www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf> Depreciation Basics<www.uphelp.org/pdfs/DepreciationTipSheet.pdf> Pangaria, et.al. (2009). A Case Study on the Depreciation at Delta Airline and SingaporeAirlines