300607 Composite and Group System of Depreciation 2D

Question 1

Which of the following uses the straight-line depreciation method?

Neither group depreciation nor composite depreciation

Composite depreciation

Group depreciation

Both group depreciation and composite depreciation

Answer 1

Both group depreciation and composite depreciation

Group depreciation applies an average (straight-line depreciation) rate to an entire group of similar assets, hence the term group depreciation.

Composite depreciation applies an average (straight-line depreciation) rate to an entire group of dissimilar assets.

Question 2

2242.15
Group-or-composite depreciation

Answer 2

Group-or-composite depreciation: Many companies compute depreciation by using the group-or-composite-depreciation method rather than calculating depreciation for each asset separately. The term “group” refers to a collection of similar assets. The term “composite” refers to a collection of dissimilar assets. The procedural aspects of the two methods are essentially the same. The composite method is demonstrated as follows:

Question 3

2242.16
The composite rate

Answer 3

The composite rate is applied to the balance in the asset account at the beginning of the year. If the balance in the asset account does not change, the group of assets will be depreciated to the estimated salvage value at the end of the composite life. Thus, in the example, if the balance in the asset account remains at $80,000, the group of assets will be depreciated to the $12,000 salvage value in 4.69 years.

Question 4

2242.17
One of the underlying assumptions of the group-or-composite method

Answer 4

One of the underlying assumptions of the group-or-composite method is that assets in the group are regularly replaced with other assets similar to the ones being replaced. As an asset is retired or replaced, an entry is made to remove the original cost from the asset account, with the difference between original cost and the proceeds received being debited to accumulated depreciation. Thus, under normal conditions, no gain or loss is recognized on the retirement of a specific asset included in the group.

Question 5

Composite Life System

Answer 5

Composite life system is a depreciation method that applies a composite rate of depreciation to a heterogeneous group of assets, such as all the assets in a plant. The composite depreciation rate is based on a weighted-average of the various lives of the assets in the group. It is based on the total carrying amount of the group regardless of the age of each individual asset in the group. No gain or loss is recognized on the disposal or retirement of an individual asset in the group.

The computation is composite depreciation expense = the composite depreciation rate × the group total carrying amount.

Question 6

Group System of Depreciation

Answer 6

The group system of depreciation is a depreciation method that applies an average rate of depreciation to a homogeneous group of assets. The homogeneous group is based on similar use characteristics and similar useful life (e.g., all trucks). It is based on the total carrying amount of the group regardless of the age of each individual asset in the group. No gain or loss is recognized on the disposal or retirement of an individual asset in the group.

The computation is:

Group depreciation = Average deprecation rate expense × Group total carrying amount

Question 7

Straight-Line Method

Answer 7

Question 8

2242.18
For example,

Answer 8

Question 9

2242 Study Guide 1

Answer 9

Question 10

2242 Study Guide 2

Answer 10