CALAir is a small charter airline company that operates between San Francisco and Los Angeles. On January 2, 2009, CALAir purchased a jet costing $2,600,000 with an estimated salvage value of $700,000 at the end of its five-year (or 500,000 mile) life. CALAir expects that the jet will be flown the following number of miles over its life:
2009............................................... 100,000 miles
2010............................................... 120,000 miles
2011............................................... 130,000 miles
2012............................................... 90,000 miles
2013............................................... 60,000 miles
Required:
(a) Prepare a depreciation schedule for the jet under each of the following methods:
(1) Straight-line
(2) Double-declining-balance
(3) Units-of-production (use)
(b) In your opinion, which of these three depreciation methods is most consistent with the matching principle? Defend your answer.
(c) Shortly after the jet was purchased, CALAir wanted to borrow a large sum of money from a local bank. Which of the three depreciation methods might CALAir want to use to prepare the financial statements needed by the bank loan officer? Defend your answer.
(d) Suppose that, at the time the jet was purchased, CALAir had a large loan outstanding from a local bank. How, if at all, would the choice of a depreciation method affect CALAir’s ability to repay the bank loan? Discuss the rationale for your answer.