A recent annual report for Delta Air Lines included the following note:

Assume that Delta made extensive repairs on an airplane engine, increasing the fuel efficiency and extending the useful life of the airplane. The existing airplane originally cost $45,000,000, and by the end of last year, it was half depreciated based on use of the straight-line method, a 20-year estimated useful life, and no residual value. During the current year, the following transactions related to the airplane were made:
a. Ordinary repairs and maintenance expenditures for the year, $7,000,000 cash.
b. Extensive and major repairs to the airplane’s engine, $2,700,000 cash. These repairs were completed at the end of the current year.
c. Recorded depreciation for the current year.

Required:
1. Applying the policies of Delta, complete the following, indicating the effects for the preceding expenditures for the current year. If there is no effect on an account, write NE on the line.

2. What was the net book value of the aircraft on December 31 of the current year?
3. Explain the effect of depreciation on cash flows.

Transcribed Image Text:

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Maintenance Costs We record maintenance costs related to our fleet in aircraft maintenance materials and outside repairs. Maintenance costs are expensed as incurred, except for costs incurred under power-by- the-hour contracts, which are expensed based on actual hours flown. Modifications that enhance the operating performance or extend the useful lives of airframes or engines are capitalized and amortized over the remaining estimated useful life of the asset or the remaining lease term, whichever is shorter.