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Describe concept of composite depreciation.
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.
| Asset | Cost (Rs.) | Residual value (Rs.) | Lifespan (years) |
|---|---|---|---|
| Asset – 1 | 10000 | 2000 | 8 |
| Asset – 2 | 25000 | 4000 | 7 |
| Asset – 3 | 5000 | 500 | 3 |
| Asset – 4 | 80000 | 10 |
Solution
The solution is as follows −
| Asset | Cost (Rs.) | Residual value (Rs.) | Depreciation cost (Rs.) | Lifespan (years) | Deprecation (Rs.) |
|---|---|---|---|---|---|
| Asset – 1 | 10000 | 2000 | 10000 – 2000 = 8000 | 8 | 8000/8 = 1000 |
| Asset – 2 | 25000 | 4000 | 25000 – 4000 = 21000 | 7 | 21000/7 = 3000 |
| Asset – 3 | 5000 | 500 | 5000 – 500 = 4500 | 3 | 4500/3 = 1500 |
| Asset – 4 | 88000 | 88000 – 0 = 88000 | 10 | 88000/80 = 1100 | |
| Total | 128000 | 6600 |
Group depreciation = depreciation / total cost
= 6600 / 128000
= 5.16%
Average useful life = 1/group depreciation
= 1/5.16%
= 19.38 years
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