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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

Fernandez Corporation purchased a truck at the beginning of 2017 for \(50,000. The truck is estimated to have a salvage value of \)2,000 and a useful life of 160,000 miles. It was driven 23,000 miles in 2017 and 31,000 miles in 2018. Compute depreciation expense for 2017 and 2018.

In the extractive industries, businesses may pay dividends in excess of net income. What is the maximum permissible? How can this practice be justified?

Jurassic Company owns machinery that cost \(900,000 and has accumulated depreciation of \)380,000. The present value of expected future net cash flows from the use of the asset are expected to be \(500,000. The fair value less cost of disposal of the equipment is \)400,000. Prepare the journal entry, if any, to record the impairment loss.

Shumway Oil uses successful-efforts accounting and also provides full-cost results as well. Under fullcost, Shumway Oil would have reported retained earnings of \(42 million and net income of \)4 million. Under successful effort, retained earnings were \(29 million, and net income was \)3 million. Explain the difference between full-costing and successful-efforts accounting.

(Depreciation for Partial Periods鈥擲L, Act., SYD, and Declining-Balance) The cost of equipment purchased by Charleston, Inc., on June 1, 2017, is \(89,000. It is estimated that the machine will have a \)5,000 salvage value at the end of its service life. Its service life is estimated at 7 years, its total working hours are estimated at 42,000, and its total production is estimated at 525,000 units. During 2017, the machine was operated 6,000 hours and produced 55,000 units. During 2018, the machine was operated 5,500 hours and produced 48,000 units.

Instructions Compute depreciation expense on the machine for the year ending December 31, 2017, and the year ending December 31, 2018, using the following methods.

  1. Straight-line.
  2. Units-of-output.
  3. Working hours.
  4. 厂耻尘-辞蹿-迟丑别-测别补谤蝉鈥�-诲颈驳颈迟蝉.
  5. Declining-balance (twice the straight-line rate).
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