S7-7. (Learning Objective 4: Selecting the best depreciation method for income tax purposes)

This exercise uses the assumed AirAsia data from Short Exercise 7-5. Assume AirAsia is trying to decide which depreciation method to use for income tax purposes. The company can choose from among the following methods:

(a) straight-line,

(b) units of production, or (c)

double-declining-balance.

1. Which depreciation method offers the tax advantage for the first year? Describe the nature of the tax advantage.

2. How much income tax will AirAsia save for the first year of the airplane’s use under the method you selected above as compared with using the straight-line depreciation method?

Assume the tax rate is 30%. Ignore any earnings from investing the extra cash.