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An airline company bought and put into operation a jet aircraft on 1 February 2017 for $7 000 000. The expectation then was that the aircraft would be flown for a total of 10 000 hours over a period of 4 years and then traded in for a new model. The trade-in value was expected to be $1 500 000 at the end of January 2021. The number of flying hours actually logged by the aircraft was as follows:
Year to 31 January 2018 3000
Year to 31 January 2019 2800
Year to 31 January 2020 2300
Year to 31 January 2021 500The aircraft had a serious accident in June 2020 and was a total write-off; although an insurance company agreed to pay $1 200 000 in settlement. REQUIRED: a. Calculate the depreciation charges for each of the four financial years to 31 January 2021
i. Using the straight line basis (applied on a full year basis) and
ii. On a basis of flying hours logged.You will find depreciation explained and the straight-line basis illustrated in Chapter 6 of our FA notes available here https://opentuition.com/acca/fa
Or in Chapter 5 of FFA if you are preparing for CIMA exams https://opentuition.com/cima/cima-ba3
If you understand what depreciation is any “per unit” basis of apportionment is very straight-forward even though it is not examinable in either of the financial accounting exams – simply apportion the depreciable amount on the given basis – in this cases hours.
The same chapters referenced also cover asset disposals – just like a sale but with insurance proceeds.
Hi.. Thank you for your reply.
Is it good the way i did:Depreciation = Cost – Residual Value / Number of years
7000000 – 1200000 / 4
= $1450000For Straight Line Method – Income statement = expenses the same amount every accounting period.
Year 2018 – $1450000
Year 2019 – $1450000
Year 2020 – $1450000
Year 2021 – $1450000ii)Total number of hours logged for 4 years: 10000 hrs
Total depreciation charged for 4 years: $5800000
Therefore to calculate depreciation for hours logged for each year:Total depreciation
Total no of hours logged 5800000
10000
= $580Year to 31 January 2018 – 3000 x 580 = $1740000
Year to 31 January 2019 – 2800 x 580 = $1624000
Year to 31 January 2020 – 2300 x 580 = $1334000
Year to 31 January 2021 – 500 x 580 = $290000Your approach is correct but residual value is what you expect from the outset – when you start depreciating – management can’t foresee that there will be an accident. So residual value is $1.5m.
Thank you so much.
Is the second part correct?
and what are the appropriate ledgers I have to do?Your 2nd part has to be wrong for the same reason – depreciable amount is $5.5m.
Please refer to the chapters that I originally referenced – you will find related lectures to talk you through the ledger entries.
Is it okay now
7000000 – 1500000 / 4
= $1375000
Each year depreciation = $1375000ii) Total number of hours logged for 4 years: 8600 hrs
Total depreciation charged for 4 years: $5500000
Therefore to calculate depreciation for hours logged for each year:Total depreciation / Total no of hours logged
5500000 / 8600
= $639.53Year to 31 January 2018 – 3000 x 639.53 = $1918590
Year to 31 January 2019 – 2800 x 639.53 = $1790684
Year to 31 January 2020 – 2300 x 639.53 = $1470919
Year to 31 January 2021 – 500 x 639.53 = $319765(i) yes but (ii) NO
For the same reason as you cannot now when you start recording depreciation what will be the actual residual value, you cannot know what will be the actual hours logged.
Everything about the calculation of depreciation apart from cost, which is the only “known”, has to be an estimate.
Here it is:
Total number of hours logged for 4 years: 10000 hrs
Total depreciation charged for 4 years: $5500000
Therefore to calculate depreciation for hours logged for each year:Total depreciation
Total no of hours logged 5500000 / 10000
= $550Year to 31 January 2018 – 3000 x 550 = $1650000
Year to 31 January 2019 – 2800 x 550 = $1540000
Year to 31 January 2020 – 2300 x 550 = $1265000
Year to 31 January 2021 – 500 x 550 = $275000Many many thanks 🙂
You’re welcome – but please note that this is the Ask the tutor forum for the Ethics and Professional Skills module of ACCA – please choose the relevant forum if you have further questions. However, if you are not using OpenTuition’s materials to study for ACCA/CIMA you should not ask a tutor – but you may mind a student will reply to you on one of the student forums if you post it to the most relevant subject area.
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