Essay on Airplane Accounting Case

Submitted By Greektiger
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Pages: 7
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Part I: Airplanes
1)

Northwest
Delta
United
Book Value January 1, 2005
$75.000
$75.000
$75.000
Residual
$3.750
$3.750
$3.750
Depreciable Amount
$71.250
$71.250
$71.250
Useful Life
14.5 years
20 years
27.5 years
Annual Depreciation
$4.914
$3.563
$2.591
Accumulated Depreciation at December 31, 2008
$19.655
$14.250
$10.364
Book Value at December 31, 2008
$55.345
$60.750
$64.636
Sale Price I
$55.000
$60,000
$65,000
Gain (Loss) on Sale I
$(0.345)
$(0.750)
$0.364
Sale Price II
$60.000
$60.000
$60.000
Gain (Loss) on Sale II
$4.655
$(.0750)
$(4.636)

2) One possible reason that these three companies depreciate the same equipment using different useful lives is that they may use the equipment differently. For example, Northwest may use the same aircraft far more during the year by either using it more frequently for a greater number of flights, or by using it more expansively for longer flights such as international flights. On the other hand, United might be using the aircraft far less frequently and for far shorter regional flights. The whole idea behind depreciation is to demonstrate to the financial report reader how “used up” the property is. Obviously, if Northwest is using the aircraft more frequently and for longer flights, it is more “used up” then if United is using its aircraft in the manner described above.
A second reason that the companies might depreciate the same equipment over different useful lives is that one company may anticipate investing more in the ongoing maintenance, care, and upkeep of the aircraft, thereby extending its useful life. If Northwest has made a strategic decision that newer and more technologically advanced aircraft are advantageous to its overall business model, it might plan on disposing of the aircraft sooner. An accompanying decision may be that the company performs regular required maintenance, but does not go above-and-beyond to extend the life of the aircraft. On the other hand, maybe United has decided that the additional yearly maintenance cost is the right decision for it, as newer aircraft is not important to its business model, and extending the life of the aircraft is more financially prudent.
3) I think the first set of sale prices is more realistic. The truth is that the three companies probably have not used the aircraft identically over the preceding 4 years, the aircraft have probably been exposed to different environmental conditions, and the companies have probably not performed identical maintenance/repairs on the planes. Its just highly unlikely that each piece of aircraft, especially at the values that we are talking about, would be worth identical amounts. Part II: Garbage Trucks
1) The primary charges against Waste Management were that its management improperly eliminated or deferred expenses in order to inflate earnings. They did this by making unsupported changes in depreciation estimates (extending the useful lives of garbage trucks, containers, and equipment), failing to record expenses necessary to write off costs of impaired assets (substantially used or abandoned landfills) by carrying it at cost when it was impaired, establishing inflated reserves in acquisitions to hide unrelated expenses, improperly capitalizing interest expenses after landfills were substantially ready for use (a direct violation of GAAP), and failing to establish sufficient reserves for certain liabilities, particularly taxes.
2) The management of Waste Management improperly decreased depreciation expense, thereby increasing earnings. They did this by unjustifiably extending the useful lives of garbage trucks, containers, and equipment, while at the same time making unsupported increases in the salvage value of the assets. The extension of the useful lives decreased yearly depreciation expense by spreading depreciation over more years, and the increase in salvage value decreased
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