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“We re going to be looking at a special depreciation method. And it s called called a group or composite life method and this is where we use a weighted rate of the assets. The appreciable cost and their estimated lives. So what we do is we do preciate a multiple or multiple asset accounts.
Using one depreciation rate. Only one depreciation rate. So how we set this up. Here is we have a group of assets and we re going to have in this case s.
It s a through e. So we have five assets in our group. Here and then we have to determine there it would they re the original cost their estimated salvage value. And that s for each one of these assets here and then our depreciable cost our estimated life and then the depreciation per year here.
So let s look at just asset a. Here how we account for that. So the depreciable. Cost here is 70000.
Would be the original cost of eighty. One thousand less its estimated salvage value here and then the depreciation per year of seven thousand would be just taking its depreciable cost here of seventy thousand divided by its estimated life year of ten years. That s going to give your depreciation per year here of seven thousand dollars. So all you have to do is take your total amounts here for your assets cost.
Here you total those up the estimated salvage value take your total amount here for those of that group of assets. The same for your depreciable cost here and the same here for your pre shi ation per year. Okay. None of these perman are in this composite rate or this one depreciation rate.
All we do is take our depreciation expense per year here thirty three thousand five hundred and divided by the total groups original cost here three hundred five thousand two hundred dollars and we re going to get a composite depreciation rate here of eleven percent here for this group..
And that is a weighted average rate. Here and then the composite life all. It is is the total depreciation cost here of two hundred sixty nine thousand four hundred dividers divided by the depreciation per year here of thirty three thousand five hundred and that s going to give us a composite life of 80. Four years here for this total group of assets.
Okay. So now let s look at the case. One here. So.
If there is no change in the asset account depreciate. The group of assets to their residual value. So what we mean here by no change. Let s just go up here our cost our salvage values and in our estimated lives.
We didn t have any change here in any of those here nor that we get rid of our sell off any of these here or bring any more into the group. So. The group stayed. The same here.
The same same metrics. Here for this group. Here. There was no change.
So to determine our depreciation per year. It s simply that total group costs here are three hundred five thousand two hundred dollars times. This composite rate of depreciation 11 percent per year. Is going to give us thirty three thousand five hundred dollars depreciation per year for this group.
And if we go back and look at it that was our total amount of depreciation for your expense..
Here. Thirty three thousand five hundred dollars and then to note here it will take. 80. 480.
For years to depreciate this total group of assets and then the record. The depreciation each year here on our balance sheet. We take our accumulated depreciation account here and we credit. It for a thirty three thousand five hundred dollars and then the debit would go to our depreciation expense here for plant assets on our income statement.
Here for thirty three thousand five hundred dollars. So we ve used this composite depreciation here per rate here per year to determine the accumulated depreciation for that group of assets here a through. We now let s look up at the example here are the case here where if an asset is retired before or after the average service life of the group is reached here that was that 804. Years then you have to include any resulting gain or loss in accumulated depreciation and we handle that this gain or loss here.
In a little different fashion here well. We re well let s just look at it. Here. So.
Let s just. Take we had one asset here. Acid. D was sold for 10000.
After six years. Here and acid. D. Had a seven year life.
So we ve disposed of it before its life was a seven year life here and then we receive cashier of ten thousand dollars for it now if we had a any other number of assets..
We d in this group here and we had changes in them. When you have to go through in the similar fashion. But this looks at the normal situation here. If we had used the single unit depreciation here.
We depreciated this asset separately. It wasn t part of a group here. What we would do for our single unit. Depreciation all we do is we take our.
Asset these costs here of. 38000 less it s accumulated depreciation in this case. 30000. Yeah it comes up with a book value here of.
8000 and then remember we receive cash here when we sold it for 10000. So we would have recognized the gain here the difference between its book value and the cash received a gain of 2000. Now with this composite method here we don t handle we don t recognize any gains or losses. And we calculate calculated different differently here so again.
This is there s no gain or loss here for the composite method here. So. What we do here is we for the composite. Method all we do is take the assets cost here of 38000.
And less the cash received or the difference between the the particular. Asset these costs here and the cash received the 10000 and it s going to go to an accumulated depreciation account here for 28000. Okay. So just review.
It here using the composite method do not record any gain or loss..
All you do is take the assets cost and compare it to the cash received and the difference here we go to accumulated depreciation so. Again 38000 less 10000 28000. That s gonna reduce accumulated depreciation so let s look at how we record this transaction here where we sold asset d. Here so we would have received cash here and this is on our balance.
Sheet here we receive cash here debit that for 10000. For the cash received and then for plant assets here for asset d. We d remove it off our balance sheet. Here.
So that we would credit or reduce our plan assets here at its original cost here of 38000. And then the difference here was goes to accumulated depreciation. So accumulated depreciation is essentially a balancing account here between the cash and the selling off of the assets so accumulated depreciation would and you can see it is reduced here by 28000. Okay.
Then just going back here so just to review here. No gain or loss instead the difference between our cost and cash. Received is debited or reduces our accumulated depreciation again. Composite method here you can see it at cost and the difference between the cost here and cash receive goes to accumulated depreciation here of 28000.
Okay. So you can see here when you have to deal with these groups or group. A group of assets here when using this composite method here you have to hand. It you re gonna have to deal with these assets that move in and out of this group either sold or whatever.
There s some changes in it. And when you do here. You don t use this single unit method here for calculating and in gain or loss. What you have to use is your gain or loss here using this composite method okay so that summarizes it here using this group or composite life method here for depreciating a ” .
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