Ernerst Enterprises purchased an airplane on November 1, 2014 for $120 million.

Question

Ernerst Enterprises purchased an airplane on November 1, 2014 for $120 million. Test runs and weapon system checks costing $20 million were performed to prepare the airplane for duty. Ernest estimates that the airplane will last 6 years and can be sold at a salvage value of $20 million. Ernest uses the straight-line method of depreciation for financial reporting and applies the half-year convention to assets placed in service in the middle of a fiscal year. On January 1, 2017 the Company determines that the salvage value of the airplance will be $10 million and that the ship will only remain useful until December 31, 2018. Provide the footnote disclosure related to Ernest's change in depreciation policy for the year ended December 31, 2017. Show calculations.

Explanation / Answer

Ernest Enterprises Depreciation per normal working (Straight Line Method) $ $ Cost on 1 November 2014 120000000 Incidental Expenses 20000000 140000000 Salvage Value -20000000 Value for depreciation 120000000 Useful Life 6 years Annual Depreciation 20000000 $ 20 million per year Depreciation for year 1 (2014) 10000000 $ 10 million Depreciation for 2015 20000000 Depreciation for 2016 20000000 WDV of Airplane as on 1 January 2017 70000000 $ 70 million Depreciation for 2016 -20000000 Adjusted WDV as on 31 December 2017 50000000 $50 million If depreciation is worked out based on the new principle that the salvage value is only $ 10 million, and the useful life is 5 years (till 31 December 2018) Depreciation per Adjusted working (Straight Line Method) $ $ Cost on 1 November 2014 120000000 Incidental Expenses 20000000 140000000 Salvage Value -10000000 Value for depreciation 130000000 Useful Life 5 years Annual Depreciation 26000000 $ 26 million per year Depreciation for year 1 (2014) 13000000 $ 13 million Depreciation for 2015 26000000 Depreciation for 2016 26000000 WDV of Airplane as on 1 January 2017 65000000 $ 65 million Depreciation for 2017 -26000000 Adjusted WDV as on 31 December 2017 39000000 $39 million Footnote for Disclosure : Owing to a change in the basis of depreciation working on the airplane earlier depreciated on a useful life of 6 years, and now being depreciated on a useful life of 5 years, with a reduction in salvage value, has led to an additional depreciation charge for the year of $ 6 million, and thereby a reduction in the WDV of the same as on 31 December 2017 by $ 11 million, compared to the previous year.

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