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Langer Airline is converting from piston-type planes to jets. Delivery time for the jets is 3 years, during which substantial progress payments must...
Langer Airline is converting from piston-type planes to jets. Delivery time for the jets is 3 years, during which substantial progress payments must be made. The multimillion-dollar cost of the planes cannot be financed from working capital; Langer must borrow funds for the payments.
Because of high interest rates and the large sum to be borrowed, management estimates that interest costs in the second year of the period will be equal to one-third of income before interest and taxes, and one-half of such income in the third year.
After conversion, Langer's passenger-carrying capacity will be doubled with no increase in the number of planes, although the investment in planes would be substantially increased. The jet planes have a 7-year service life.
Instructions
Give your recommendation concerning the proper accounting for interest during the conversion period. Support your recommendation with reasons and suggested accounting treatment. (Disregard income tax implications.)
