Company X has a more realistic method of depreciation. The fifteen years’ lifetime for the airplane is reasonable. However, the use of the asset results in the wear and tear hence the need for the depreciation allowance. Besides, the airline industry is characterized by changes in technology. New and efficient airplanes are assembled and released into the market periodically. The prices of the assets also keep changing based on the various market forces. Therefore, assuming that the asset will have a useful life of twenty-five years is illogical. The salvage value will also be lower hence the 10% sounds reasonable. This paper evaluates the depreciation methods of airline X and Y.
As a passenger, I would feel uncomfortable traveling in the twenty-five-year-old plane. It may lack the features that other aircraft in the market might offer. The engine of the plane may have worn out making the flight slow and prone to mechanical repairs. Besides, the plane will be old, and most of its facilities will be old too.
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The estimates in the Airline X enabled it to pass out relatively higher amounts of depreciation in its balance sheet. The depreciation was deducted in the computation of taxable profits (Wielenberg & Scholze, 2007). Consequently, the business was able to report slightly lower profits and pay slightly lower taxes as compared to airline Y. The depreciation expense reported will be more by $260,000 in the statement of financial performance of X than in that of Y. The increased repair and mechanical cost of running an old and inefficient plane may result in the company going out of business. Airline X may have plans to replace the plane in 15 years whereas airline Y has such plans in twenty-five years.
References
Wielenberg, S., & Scholze, A. (2007). Depreciation and impairment: a trade-off in a stewardship setting. Depreciation and impairment: a trade-off in a stewardship setting .
