Depreciation: Airplanes and Garbage Trucks
Part I: Airplanes
Assume that on January 1, 2005, each of the three airlines purchases a new Boeing 757 for $75 million. Each airline estimates that the residual value will be 5% of cost. Each airline uses the average depreciation period that is consistent with its policies as stated in the Appendix, found on page 3. On January 1, 2009, each firm sells the plane. First, assume that Northwest sells its plane for $55 million, Delta sells its plane for $60 million, and United sells its plane for $65 million (Sale Price I). Second, assume each firm sells its plane for $60 million (Sale Price II).
Complete the following table. Report the dollar amounts in millions, rounded to thousands
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The defendants accomplished this by altering depreciation expenses, not recording other expenses, improperly capitalizing a variety of expenses and failing to establish sufficient reserves to pay for taxes and certain expenses. When the fraudulent activities were brought to the attention of the investors and the public, the company's stock dropped by 33%, resulting in a $6 billion loss for the investors. The charges against the defendants of Waste Management were as follows: securities fraud, filing false periodic reports, falsification of books and records, and lying to auditors. How did management use depreciation expense to manage earnings? A large part of the fraudulent practices instituted by the top executives of Waste Management was the manipulation of depreciation expenses. Essentially, the defendants continually extended the useful life of the company's garbage trucks and at the same time increased the trucks' salvage values. This made the trucks worth much more on paper than they were in reality. In turn, the company had less expenses to report which made it seem as if there was much more income. Why do you think the managers of Waste Management wanted to manage earnings? There were a few reasons that the managers wanted to manage the earnings. One reason was to simply raise the price of the stock. If earnings were to increase, then stock prices would increase. Also, the managers of Waste Management made bonuses