Question

Brazil Group purchases a vehicle at a cost of \(50,000 on January 2, 2017. Individual components of the vehicle and useful lives are as follows.

	Cost	Useful Lives
Tires	\) 6,000	2 years
Transmission	10,000	5 years
Trucks	34,000	10 years

Instructions

(Assume no residual (salvage) value.)

1. Compute depreciation expense for 2017, assuming Brazil depreciates the vehicle as a single unit.
2. Compute depreciation expense for 2017, assuming Brazil uses component depreciation.
3. Why might a company want to use component depreciation to depreciate its assets?

Short answer

1. Depreciation = $5,000.
2. Total depreciation expense = $8,400.
3. A company might want to use component depreciation to depreciate its assets for more accurate results.

Step-by-step solution

Meaning of Depreciation

In financial accounting, depreciation could be a strategy for spreading out the cost of tangible resources over their functional lives. Essentially, it is the disintegration of the value of an asset, which happens over time due to continuous use and abrasion of the asset.

(a) Computing depreciation expense for 2017

Depreciation expense for 2017 is $5,000

Working Notes:

$\begin{array}{c}\text{Depreciation\hspace{0.17em}}=\frac{\text{Cost\hspace{0.17em}of\hspace{0.17em}asset}-\text{Salvage\hspace{0.17em}value}}{\text{Useful\hspace{0.17em}life}}\\ =\frac{\$50,000-0}{10}\\ =\$5,000\end{array}$

(b) Computing depreciation expense for 2017

Component	Calculation	Depreciation Expense
Tires	$\frac{\$6,000-0}{2}$	$3,000
Transmission	$\frac{\$10,000-0}{5}$	2,000
Trucks	$\frac{\$34,000-0}{10}$	3,400
		$8,400

(c) Explaining the reason for the use of composite depreciation

A company would want to use component depreciation if it believes that this method produces more accurate results.

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.