Problem 1 (20%)

LO-2: Perform and implement accounting analysis and financial analysis In 2009 Lufthansa, the
German national airline, reported that it depreciated its aircraft:

A) Over 15 years on straight-line basis, with an estimated residual value 12 percent of initial cost.

B) Over 10 years on a straight-line basis, with estimated residual value 18 percent of initial cost

Lufthansa reported in its 2009 Annual Report The Total Cost its aircraft at the beginning of 2009 as €
17,918 m, and accumulated depreciation was € 10,547 m. Marginal tax rate 25%. Air France-KLM
reported that its aircraft depreciation was also estimated using the straight-line method, but
assuming an average life 20 years and no residual value.

In analyst opinion, there do not appear to be operating differences that explain the differences in
the two firms. The analyst may well decide that is necessary to adjust the depreciation rates for one
or both firms to ensure that their performance is comparable. What adjustments would be required
for Lufthansa’s aircraft depreciation? Show complete steps to make adjustment to the December 31,
2008 balance sheet.