Question

Several years ago, a Delta Airlines 727 crashed in Dallas. The crash resulted in a gain of $.11 per share of Delta. How could this happen? Consider the accounting for airplanes. Airlines insure their airplanes at market value, $6.5 million for Delta’s 727. However, the planes’ book values are often much less because of large accumulated depreciation amounts. The book value of Delta’s 727 was only $962,000.

Exhibit 16-25
Non-current assets
Property, plant, and equipment ... £ 8,784
Intangible assets ......... 151
Investments in joint ventures .... 502
Available-for-sale financial assets .. 176
Other receivables ......... 36
Retirement benefit asset ....... 29
9,678
Current assets
Inventories ........... 812
Trade and other receivables ...... 343
Derivative financial instruments ..... 52
Cash and cash equivalents ....... 501
1,708
Non-current assets held for sale ..... 13
1,721
Total assets .......... 11,399

Current liabilities
Trade and other payables ...... (2,597)
Short-term borrowings ........ (74)
Derivative financial instruments ..... (59)
Taxes payable ........... (201)
Provisions ............. (11)
(2,942)
Net current liabilities ........ (1,221)

Non-current liabilities
Other payables ........... (120)
Long-term borrowings ........ (2,339)
Deferred income tax liability ..... (172)
Provisions ............. (62)
Retirement benefit obligations ...... (340)
(3,033)
Net assets ............ £ 5,424
Equity
Called up share capital ........ £ 535
Share premium account ....... 1,048
Capital redemption reserve ........ 680
Other reserves ........... (213)
Retained earnings .......... 3,374
Total equity ........... £ 5,424
1. Suppose Delta received the insurance payment and immediately purchased another 727 for $6.5 million. Compute the effect of the crash on pretax income. Also compute the effect on Delta’s total assets.
2. Do you think a casualty loss should generate a reported gain? Why?



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  • CreatedNovember 19, 2014
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