On January 1,

2017,

AmerEx

Transportation Company purchased a used aircraft at a cost of

$48,400,000.

AmerEx

expects the plane to remain useful for

five

years

(7,000,000

miles) and to have a residual value of

$6,400,000.

AmerEx

expects to fly the plane

725,000

miles the first year,

1,200,000

miles each year during the second, third, and fourth years, and

2,675,000

miles the last year.

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(Click the icon to view the first year depreciation amounts under each method.)Read the requirements

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Question content area bottom

Part 1

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

The

double-declining-balance

Requirements

Dialog content starts

Assume

AmerEx

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 methods.

1.	Which depreciation method offers the highest tax advantage for the first year? Describe the nature of the tax advantage.
2.	How much income tax will AmerEx save for the first year of the airplane's use under the method you just selected as compared with using the straight-line depreciation method? The company's income tax rate is 35%. Ignore any earnings from investing the extra cash.

straight-line

units-of-production

method offers the tax advantage for the first year of the asset's use.