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Depreciation at Delta Case

Delta has extended the lives of flight equipment four times since 1986. Why would they do this?
Complete the Excel table provided as part of the assignment. When you compare the depreciation results from the planes purchased in the early 1980’s to the planes purchased in the 2000’s, what do you notice?
If there had been no adoption of “Fresh Start Accounting”, what would the Net Book Value be for aircraft D4061 and D4072 at the end of 2007? You may add a column to the provided Excel worksheet to calculate the result if you like.
When Delta elected “Fresh Start Accounting” for 2007, how did Delta establish the fair value of these assets?
In your opinion, should the adoption of “fresh start accounting” be open to any corporation where management feels traditional historical cost-based accounting no longer allows them to present a fair picture of the assets, liabilities, stockholders’ equity and operating performance of that company?

Full Answer Section

Technological Advancements:Maintenance practices and technology have improved significantly over time. This allows older aircraft to be kept operational safely and reliably for longer periods.
Regulatory Changes:Regulatory bodies may adjust airworthiness standards and inspection requirements, allowing older aircraft to meet safety regulations for extended periods.
Market Conditions:If the airline industry experiences economic downturns, extending the lifespan of existing aircraft can be a cost-effective strategy to remain competitive.

Comparing Depreciation Results:

By analyzing the provided Excel table (assuming it shows depreciation for planes purchased in the 1980s and 2000s), you might notice the following:

The planes purchased in the 1980s likely have significantly lower book values compared to the newer planes from the 2000s.This is because they have been depreciated over a longer period.
The depreciation expense for the older planes might be lower in recent years.Most depreciation methods spread the cost of the asset over its useful life. As these planes are nearing the end of their extended lifespan, their annual depreciation expense may be lower.
The newer planes will likely have a higher total depreciation expense spread over their shorter lifespan.

Net Book Value without Fresh Start Accounting:

To calculate the Net Book Value (NBV) without Fresh Start Accounting for aircraft D4061 and D4072 at the end of 2007, you would need the following information (not provided in this prompt):

Original purchase price of the aircraft
Accumulated depreciation for each aircraft up to 2007 (using the historical cost method)

Here's the formula for calculating NBV: NBV = Original Purchase Price - Accumulated Depreciation You can add a column to the Excel table and use this formula for each aircraft, considering the historical depreciation figures up to 2007, to determine the NBV without Fresh Start Accounting.

Establishing Fair Value under Fresh Start Accounting:

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

Market Approach:Comparing the value of similar used aircraft currently available for purchase.
Income Approach:Estimating the future cash flows the aircraft can generate and discounting them to their present value.
Cost Approach:Estimating the cost of replacing the aircraft with a similar new model, minus depreciation.

Fresh Start Accounting and Different Corporations:

The adoption of fresh start accounting is a complex issue with strong arguments on both sides: Arguments for Allowing Fresh Start Accounting:

Improved Financial Representation:When historical costs don't reflect the current value of assets, fresh start accounting can provide a more accurate picture of a company's financial health.
Increased Transparency:Fair value accounting can provide investors with a clearer understanding of a company's true value.
Improved Investment Decisions:More accurate financial statements can lead to better investment decisions.

Arguments Against Allowing Fresh Start Accounting:

Manipulation Risk:Companies might manipulate fair value estimates to improve their financial picture artificially.
Reduced Comparability:Financial statements become less comparable across companies if different accounting methods are used.
Loss of Historical Context:Fresh start accounting can erase valuable historical data about a company's performance.

Overall, the decision of whether to allow fresh start accounting is a complex one. There are valid arguments on both sides, and regulatory bodies need to weigh the benefits of improved transparency against the risks of manipulation.

Sample Answer

Delta Airlines and Extending Aircraft Lifespan

1. Reasons for Extending Flight Equipment Lives:

There are several reasons why Delta Airlines might extend the lifespan of its flight equipment since 1986:

Cost Savings: Newer aircraft are generally more expensive to purchase and operate. Extending the lifespan of existing aircraft allows Delta to delay these significant capital expenditures.
Maximizing Investment: Modern aircraft represent a substantial investment. By extending their lifespan, Delta gets more flight hours and use out of each aircraft, maximizing the return on investment.