Describe concept of composite depreciation.

Banking & FinanceFinanceFinance Management

Composite depreciation claims depreciation expenses by depreciates group of related assets into single entity than individual. Composite depreciation is the application of straight-line depreciation. If the asset is sold, then account entry is debited to cash and credited to fixed asset. The difference between original cost and sold cost is debited to accumulated depreciation. In composite method, no loss or no gain on sale of fixed asset is recognized.

Steps to calculate composite depreciation are as follows −

  • Accumulation of total depreciation cost of assets.
  • Allocate single useful life for asset group.
  • Yearly depreciation = useful life/ total depreciation.
  • Document the depreciation.

Example

  • Calculate depreciation using composite depreciation, the data is given below.
AssetCost (Rs.)Residual value (Rs.)Lifespan (years)
Asset – 11000020008
Asset – 22500040007
Asset – 350005003
Asset – 480000
10

Solution

The solution is as follows −

AssetCost (Rs.)Residual value (Rs.)Depreciation cost (Rs.)Lifespan (years)Deprecation (Rs.)
Asset – 110000200010000 – 2000 = 800088000/8 = 1000
Asset – 225000400025000 – 4000 = 21000721000/7 = 3000
Asset – 350005005000 – 500 = 450034500/3 = 1500
Asset – 488000
88000 – 0 = 880001088000/80 = 1100
Total128000


6600

Group depreciation = depreciation / total cost

                    = 6600 / 128000

                    = 5.16%

Average useful life = 1/group depreciation

                    = 1/5.16%

                    = 19.38 years

raja
Published on 29-Sep-2020 13:47:26
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