Question

Upper A Celty Airline jet costs $ 28,000,000 and is expected to fly 200,000,000 miles during its 10-year life. Residual value is expected to be zero because the plane was used when acquired. If the plane travels 1,000,000 miles the first year, how much depreciation should Celty Airline record under the units-of-production method? (Round the depreciation per unit to two decimal places.)

A: $2,800,000
B: $140,000
C: $560,000
D: Cannot be determined from information given

Answer 1

Celty Airline should record a depreciation expense of B) $140,000 for the first year under the units-of-production method, as this is calculated by multiplying the miles traveled (1,000,000 miles) by the depreciation rate per mile ($0.14).

Step-by-step explanation:

To calculate the depreciation for Celty Airline under the units-of-production method, we first determine the depreciation rate per mile by dividing the cost of the jet by the total miles it is expected to fly over its lifetime.

Since the plane has a cost of $28,000,000 and is expected to fly 200,000,000 miles, the depreciation per unit (mile) can be calculated as follows:

Depreciation per mile = Total cost of the jet / Total expected miles flown

Depreciation per mile = $28,000,000 / 200,000,000 miles

Depreciation per mile = $0.14

Now, if the plane has traveled 1,000,000 miles in the first year, we calculate the first year's depreciation by multiplying the miles traveled by the depreciation per mile:

First-year depreciation = Miles traveled in first year * Depreciation per mile

First-year depreciation = 1,000,000 miles * $0.14/mile

First-year depreciation = $140,000

Therefore, under the units-of-production method, Celty Airline should record a depreciation expense of $140,000 for the first year, which corresponds to option B.