Airline X depreciates its airplanes over a 15- year period and estimates a salvage value of 10% of the cost of the plane. At the same time, Airline Y depreciates identical airplanes over a 25-year period and estimates a salvage value of 15% of the cost of the plane. As expected, these different assumptions resulted in different operating results. For example, if an airplane costs $ 10 million, Airline X will depreciate $ 260,000 more per year for 15 years than Airline Y.
- Which company’s estimate of useful life more closely reflects reality?
- Will you feel comfortable as a passenger in a 25-year old airplane?
- Does the fact that Airline Y subsequently went out of business provide any information as to why its estimates were so substantially different from those of financially sound Airline X?
- Using the CSU-Global Library, identify another company which reported accounting errors or changes. How did investors’ and the public’s reaction to the report affect the company?