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?