Questions for Depreciation at Delta Case

Sample Solution

Delta Airlines and Extending Aircraft Life: A Financial Analysis Here's a breakdown of the questions regarding Delta Airlines and their practices:

1. Why Would Delta Extend the Lives of Flight Equipment Four Times Since 1986?

There can be several reasons why Delta might extend the lives of their aircraft:

• Cost Reduction:Extending the life of an aircraft allows Delta to defer purchasing new equipment, saving significant capital expenditure.
• Safety and Maintenance:As long as the aircraft meet rigorous safety standards and undergo proper maintenance, extending their lifespan can be a viable option.
• Technological Advancements:Upgrades and retrofits with newer technologies can keep older aircraft competitive with newer models in terms of fuel efficiency or passenger amenities.
• Regulatory Environment:Changes in aviation regulations or economic factors might influence decisions to extend aircraft life cycles.

2. Depreciation Results - Early 1980s vs. 2000s Aircraft

By comparing the depreciation results for aircraft purchased in the early 1980s to those purchased in the 2000s in the provided Excel table, you might notice:

• Higher Starting Depreciation Expense:Newer aircraft (2000s) likely have a higher initial cost compared to older aircraft (1980s). This results in a higher depreciation expense in the early years for the newer planes.
• Slower Depreciation over Time:Due to the extended lifespan of older aircraft (potentially with additional depreciation schedules added), their depreciation expense might be spread out over a longer period compared to the newer aircraft with a standard depreciation schedule.

3. Net Book Value without "Fresh Start Accounting"

To calculate the Net Book Value (NBV) for aircraft D4061 and D4072 at the end of 2007 without "Fresh Start Accounting," you can add a new column to the Excel table. This column would calculate the NBV by subtracting the accumulated depreciation from the original purchase cost for each year. The ending balance of this column for 2007 would represent the NBV without "Fresh Start Accounting."

4. Establishing Fair Value under "Fresh Start Accounting"

When Delta adopted "Fresh Start Accounting" for 2007, they likely used various methods to establish the fair value of their assets, including:

• Market Valuation:Comparing the value of similar used aircraft of the same age and model being sold in the market.
• Income Approach:Estimating the future cash flows generated by the aircraft and discounting them to their present value.
• Appraisal:Hiring an independent appraiser to assess the fair market value of the aircraft based on their condition and expected remaining useful life.

5. Should "Fresh Start Accounting" Be Open to All Corporations?

"Fresh Start Accounting" is a controversial practice. Here's a breakdown of the arguments for and against allowing it: Arguments for Allowing "Fresh Start Accounting":

• Improved Financial Reporting:It can allow companies facing financial difficulties to present a more accurate picture of their current financial health.
• Increased Investment:Improved financial reports might attract investors by showcasing a stronger financial position.

Arguments Against Allowing "Fresh Start Accounting":

• Lack of Transparency:It can manipulate historical financial data, making it difficult for investors to compare a company's performance over time.
• Potential for Abuse:Companies might use it to hide past financial problems or inflate asset values.

Overall Opinion: "Fresh Start Accounting" should be used with caution and under strict regulations. Independent audits and clear disclosures are crucial to ensure transparency and prevent manipulation of financial statements. It's generally recommended that companies use traditional historical cost-based accounting whenever possible. However, there might be exceptional circumstances where "Fresh Start Accounting" could be considered with proper justification and regulatory oversight.