Accounting Changes and Error Analysis

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?