WestJet Airlines Ltd. is one of Canada's leading airlines, offering service to destinations in Canada, the United States, Mexico, and the Caribbean. The following is a partial extract from its December 31, 2011, notes to the financial statements:
Note. 1 (j) Statement of Significant Accounting Policies-Property and Equipment
Property and equipment is stated at cost and depreciated to its estimated residual value.
Asset class __________________________________ Basis _____________Rate_____
Aircraft, net of estimated residual value ........... Straight-line ......... 20 years
Engine, airframe and landing gear overhaul........ Straight-line ......... 8 to 15 years
Buildings ............................................... Straight-line ......... 40 years
Leasehold improvements ............................. Straight-line ......... Term of lease
Assets under finance leases .......................... Straight-line ......... Term of lease
Major overhaul expenditures are capitalized and depreciated over the expected life between overhauls. All other costs relating to the maintenance of fleet assets are charged to the consolidated statement of earnings on consumption or as incurred.
Instructions
(a) WestJet uses straight-line depreciation for all of its depreciable property and equipment. For which of the assets shown above might WestJet consider using units-of-production instead of straight-line depreciation? Should WestJet use units-of-production for those assets?
(b) According to this note, major overhaul expenditures are treated differently than other fleet maintenance costs.
Explain how WestJet records these items. Is this appropriate? Why or why not?
(c) WestJet depreciates the cost of leasehold improvements, and assets under finance leases over the terms of the leases. Is this appropriate? Are these terms the same as the physical lives of these assets?
(d) Does WestJet use component depreciation for any of its property and equipment assets? Should it?