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Chapter 11: Q11Q (page 583)

Under what conditions is it appropriate for a business to use the composite method of depreciation for its plant assets? What are the advantages and disadvantages of this method?

Short Answer

Expert verified

The principal advantage is that it is not necessary to keep detailed records for each plant asset in the group.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Composite Depreciation

Composite depreciation combines a group of depreciating assets into a single entity rather than treating each item separately. In simple words, it is the application of straight-line depreciation to a portfolio. If an asset is sold, a debit is made to cash, and a credit is made to fixed assets.

02

Explaining the conditions that is appropriate for a business to use composite method of depreciation for its plant assets

Composite technique is suited for a corporation with a large number of heterogeneous plant assets for whom keeping comprehensive records would be prohibitive.

03

Explaining the advantages and disadvantages of this method

The main advantage is that comprehensive records for each plant asset in the group are not required. The main downside is that the book value of plant assets may not represent their true carrying value after a period of time.

As the difference between the cost of the asset and the cash received from its retirement is debited or credited to the Accumulated Depreciation account (i.e., no gain or loss on disposal is reported), the Accumulated Depreciation account becomes self-correcting over time.

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Most popular questions from this chapter

(Depreciation鈥擱eplacement, Change in Estimate) Greg Maddox Company constructed a building at a cost of \(2,200,000 and occupied it beginning in January 1998. It was estimated at that time that its life would be 40 years, with no salvage value.

In January 2018, a new roof was installed at a cost of \)300,000, and it was estimated then that the building would have a useful life of 25 years from that date. The cost of the old roof was $160,000.

Instructions

  1. What amount of depreciation should have been charged annually from the years 1998 to 2017? (Assume straight-line depreciation.)
  2. What entry should be made in 2018 to record the replacement of the roof?
  3. Prepare the entry in January 2018 to record the revision in the estimated life of the building if necessary.
  4. What amount of depreciation should be charged for the year 2018?

(Depreciation Choice鈥擡thics) Jerry Prior, Beeler Corporation鈥檚 controller, is concerned that net income may be lower this year. He is afraid upper-level management might recommend cost reductions by laying off accounting staff, including him.

Prior knows that depreciation is a major expense for Beeler. The company currently uses the double-declining-balance method for both financial reporting and tax purposes, and he鈥檚 thinking of selling equipment that, given its age, is primarily used when there are periodic spikes in demand. The equipment has a carrying value of \(2,000,000 and a fair value of \)2,180,000. The gain on the sale would be reported in the income statement. He doesn鈥檛 want to highlight this method of increasing income. He thinks, 鈥淲hy don鈥檛 I increase the estimated useful lives and the salvage values? That will decrease depreciation expense and require less extensive disclosure, since the changes are accounted for prospectively. I may be able to save my job and those of my staff.鈥�

Instructions

Answer the following questions.

  1. Who are the stakeholders in this situation?
  2. What are the ethical issues involved?
  3. What should Prior do?

Silverman Company purchased machinery for \(162,000 on January 1, 2017. It is estimated that the machinery will have a useful life of 20 years, salvage value of \)15,000, production of 84,000 units, and working hours of 42,000. During 2017, the company uses the machinery for 14,300 hours, and the machinery produces 20,000 units. Compute depreciation under the straight-line, units-of-output, working hours, sum-of-the-years鈥�-digits, and double-declining-balance methods.

(Composite Depreciation) Presented below is information related to LeBron James Manufacturing Corporation.

Asset

Cost

Estimated Salvage

Estimated Life (in years)

A

\(40,500

\)5,500

10

B

33,600

4,800

9

C

36,000

3,600

9

D

19,000

1,500

7

E

23,500

2,500

6

Instructions

  1. Compute the rate of depreciation per year to be applied to the plant assets under the composite method.
  2. Prepare the adjusting entry necessary at the end of the year to record depreciation for the year.
  3. Prepare the entry to record the sale of asset D for cash of $4,800. It was used for 6 years, and depreciation was entered under the composite method.

(Error Analysis and Depreciation, SL and SYD) Mike Devereaux Company shows the following entries in its Equipment account for 2018. All amounts are based on historical cost.

Equipment
2018
2018
Jan 1Balance 134,750June 30Cost of 23,000 equipment sold (purchased prior to 2018)
Aug. 10Purchases 32,000

12Freight on Equipment purchased 700

25Installation costs 2,700

Nov. 10Repairs 500

Instructions

  1. Prepare any correcting entries necessary.
  2. Assuming that depreciation is to be charged for a full year on the ending balance in the asset account, compute the proper depreciation charge for 2018 under each of the methods listed below. Assume an estimated life of 10 years, with no salvage value. The machinery included in the January 1, 2018, balance was purchased in 2016.

    a. Straight-line
    b. Sum-of-the-years鈥�-digits.
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