ASC 908-360: Aircraft Depreciation Transactions & Journal Entries in Airlines

Posted In | ASC Education | Gridlex Academy

Accounting Standards Codification (ASC) Topic 908-360, "Airlines - Property, Plant, and Equipment," provides guidance on accounting for aircraft depreciation in the airline industry. Aircraft are significant assets for airlines and are subject to depreciation over their useful lives. Proper accounting for aircraft depreciation is essential to accurately reflect the airline's financial position and performance. This article will explain the concept of aircraft depreciation transactions under ASC 908-360 and provide examples of journal entries that illustrate the proper accounting treatment for these transactions.

 

Aircraft Depreciation Transaction

Aircraft depreciation is the systematic allocation of an aircraft's cost over its useful life, which generally ranges from 20 to 30 years. The depreciation expense reflects the decline in the aircraft's value due to wear and tear, obsolescence, and other factors. Under ASC 908-360, airlines are required to use the straight-line method of depreciation for aircraft, with the depreciation expense recognized in the income statement. Additionally, airlines must consider any residual value, salvage value, or maintenance costs when calculating the aircraft's depreciation.

 

Journal Entries for Aircraft Depreciation Transaction

To better understand the accounting treatment for aircraft depreciation transactions, let's look at a hypothetical example.

 

Example:

Airline J purchases an aircraft for $120 million, with an estimated useful life of 20 years and a residual value of $20 million.

 

Journal Entry 1: Record the purchase of the aircraft

Airline J would record the initial purchase of the aircraft as follows:

 

Debit: Aircraft $120 million

Credit: Cash $120 million

 

The debit to aircraft represents the cost of the asset, while the credit to cash represents the cash outflow for the purchase.

 

Journal Entry 2: Record annual depreciation expense

Next, Airline J would calculate the annual depreciation expense using the straight-line method:

 

Annual depreciation expense = (Cost - Residual value) / Useful life

Annual depreciation expense = ($120 million - $20 million) / 20 years

Annual depreciation expense = $5 million

 

Airline J would record the annual depreciation expense as follows:

 

Debit: Depreciation Expense $5 million

Credit: Accumulated Depreciation - Aircraft $5 million

 

The debit to depreciation expense represents the annual aircraft depreciation expense, which is recognized in the income statement. The credit to accumulated depreciation - aircraft reflects the accumulated depreciation on the aircraft, which is presented as a contra-asset account in the balance sheet.

 

ASC 908-360 provides guidance on accounting for aircraft depreciation in the airline industry, ensuring that airlines accurately allocate the cost of aircraft over their useful lives. By following the principles outlined in ASC 908-360, airlines can properly account for aircraft depreciation and provide useful information to investors and other stakeholders. It is essential for accountants and financial professionals to understand and apply the principles of ASC 908-360 when dealing with aircraft depreciation transactions in the airline industry in order to maintain compliance with accounting standards and provide accurate financial information to stakeholders.