Morgan Stanley Interview Question: An airline company is replaci... | Glassdoor

Interview Question

Credit Risk Summer Analyst Interview(Student Candidate) New York, NY

An airline company is replacing their entire fleet of

  planes. The old planes have zero salvage value and there is no depreciation to deal with. Explain the effect on the the company's financial statements.
technical, accounting

Interview Answer

2 Answers


I suppose it depends if they are paying with cash or on account. The likely position is on account, so assets increase by new fleet purchase price, liabilities increase by same amount. If cash is used, then -cash and +assets. This would have an affect on statement of cash flows - cash from investing activities.

Since you cannot sell the old fleet ($0 salvage) and no depreciation is left, there is nothing you can do to write-off the old assets. No affect on financial statement regarding old fleet.

Eric on Jan 7, 2013

It would affect the financial statements in various ways. Liquidity ratios would change, potentially for the better even though the purchase is made with debt. If purchased with debt, leverage would increase. Then of course Times interest earned would change assuming revenue / CF match that of the old fleet. All else equal, ROE increases due to leverage. Etc. could go on forever.

Anonymous on Aug 1, 2017

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