Depreciation: Airplanes & Garbage Trucks Essay

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Depreciation: Airplanes and Garbage Trucks Part I: Airplanes Assume that on January 1, 2005, each of the three airlines purchases a new Boeing 757 for $75 million. Each airline estimates that the residual value will be 5% of cost. Each airline uses the average depreciation period that is consistent with its policies as stated in the Appendix, found on page 3. On January 1, 2009, each firm sells the plane. First, assume that Northwest sells its plane for $55 million, Delta sells its plane for $60 million, and United sells its plane for $65 million (Sale Price I). Second, assume each firm sells its plane for $60 million (Sale Price II). Complete the following table. Report the dollar amounts in millions, rounded to thousands…show more content…
Another reason for choosing different useful lives of the same equipment could be based upon how much and in what capacity each company uses its respective airplanes. For instance, Northwest has a much shorter useful life than United for its plane because Northwest's planes may spend more hours in the air than United's planes, giving it a shorter useful life. Which set of sale prices (I or II) do you think is more realistic? Why? Choosing the most realistic option of the sales prices is conditional. For instance, if the useful life was determined based upon the actual usage of the airplanes and the usage differed, then it is safe to assume that the sales prices would differ. If that were the case, then sales price I would be the most realistic option. If the usage were the same or nearly the same for each plane, the planes should be equal in value and sales price II would be the most reasonable option. Based upon the limited information given in this example, it would be prudent to assume that all the planes are equal in value; therefore, sales price II should be used. Part II: Garbage Trucks Summarize the charges against Waste Management in your own words. The executives of Waste Management, in order to save their jobs and keep/increase their personal bonuses, manipulated financial records in order to give the appearance to investors that certain earnings targets were
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