Question

Under what conditions is it appropriate for a business to use the composite method of depreciation for its plant assets? What are the advantages and disadvantages of this method?

Short answer

The principal advantage is that it is not necessary to keep detailed records for each plant asset in the group.

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.

Explaining the conditions that is appropriate for a business to use composite method of depreciation for its plant assets

Composite technique is suited for a corporation with a large number of heterogeneous plant assets for whom keeping comprehensive records would be prohibitive.

Explaining the advantages and disadvantages of this method

The main advantage is that comprehensive records for each plant asset in the group are not required. The main downside is that the book value of plant assets may not represent their true carrying value after a period of time.

As the difference between the cost of the asset and the cash received from its retirement is debited or credited to the Accumulated Depreciation account (i.e., no gain or loss on disposal is reported), the Accumulated Depreciation account becomes self-correcting over time.