Kim Park a

907 Words Nov 15th, 2011 4 Pages
Case Study of financial accounting | Kim Park(A) | Long-lived Nonmonetary Assets | | Maren BorsheimQiao ChenHenry Ko | 9/27/2011 |

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This case talked about Kim Park tries to investigate the accounting principle of long lived nonmonetary assets. While we try to determine the difference in various situations, we also tries to focus on the reasoning and logic of accounting principle applied.
True Star Electronics Company
General rules:
Now an entity can be either capitalized or expensed.
Capital expenditures (CAPEX or capex) are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a
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SIA depreciates its passenger aircraft over 10 years on a straight line basis to 20% residual, while DAL does the same at 20 years to 5% residual. The difference in accounting practices can be attributed to the customer segment each airline serves: SIA serves premium long haul customers and DAL serves standard short haul customers.
In order to offer a premium level of service, SIA has to have newer airplanes. Hence, the approximate age of the fleet is 5-6 years and is depreciated over a shorter lifespan. By depreciating to a 20% residual value, SIA can also gain a higher level of surplus on the books to help boost gains on sales. The 20% can also be justified because SIA operates long haul flights, meaning the airplanes are in the air longer and requires less maintenance due to the wear and tear from frequent take-offs and landings. Comparatively, DAL, which offers standard service, does not need an advanced fleet. Hence, DAL keeps its airplanes longer than SIA and the residual value is lower because of more frequent take-offs and landings.
On further analysis, SIA incurs an $8 depreciation expense for every $100 spent on an airplane and DAL incurs $4.75. From an operational standpoint, SIA can afford to depreciate at a higher rate because its load factor is greater than DAL’s (76.8% vs 72.9%). Furthermore, SIA’s revenue per passenger is higher than DAL’s (SIA $6672000000/15002000=$444, DAL $15657000000/119930000=$130), meaning SIA can weather a higher

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