Question

Dickinson Inc. owns the following assets.

Asset	Cost	Salvage	Estimated useful life
A	\(70,000	\)7,000	10 years
B	50,000	5,000	5 years
C	82,000	4,000	12 years

Compute the composite depreciation rate and the composite life of Dickinson’s assets.

Short answer

Answer

Composite rate = 10.8%

Composite life = 8.5 years

Step-by-step solution

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.

Computing the composite depreciation rate and the composite life of Dickinson’s assets

Asset	Calculation	Depreciation Expense
A		$6,300
B		9,000
C		6,500
		$21,800

Working notes:

For the calculation, part uses the formula as follows:

$\text{Depreciation\hspace{0.17em}expense}=\frac{\text{Cost\hspace{0.17em}of\hspace{0.17em}asset}-\text{Salvage\hspace{0.17em}value}}{\text{Useful\hspace{0.17em}life}}$

Calculating composite rate

$\begin{array}{c}\text{Composite\hspace{0.17em}rate}=\frac{\text{Total\hspace{0.17em}depreciation\hspace{0.17em}expense}}{\text{Total\hspace{0.17em}cost\hspace{0.17em}of\hspace{0.17em}asset}}\\ =\frac{\$21,800}{\$202,000}\\ =10.8\%\end{array}$

Calculation of composite life

$\begin{array}{c}\text{Composite\hspace{0.17em}life}=\frac{\text{Total\hspace{0.17em}asset}-\text{Total\hspace{0.17em}salvage\hspace{0.17em}value}}{\text{Total\hspace{0.17em}depreciation\hspace{0.17em}expense}}\\ =\frac{\$202,000-\$16,000}{\$21,800}\\ =\frac{\$186,000}{\$21,800}\\ =8.5\text{\hspace{0.17em}years}\end{array}$