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Composite and Group Depreciation

The document outlines the Group and Composite methods for depreciating Property, Plant, and Equipment (PPE), highlighting their differences based on the similarity of the assets and their useful lives. It provides formulas for calculating depreciation rates and composite life, along with instructions for handling asset disposals. Additionally, it includes illustrations of journal entries related to depreciation and disposal for specific equipment and an aircraft's components.

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74 views2 pages

Composite and Group Depreciation

The document outlines the Group and Composite methods for depreciating Property, Plant, and Equipment (PPE), highlighting their differences based on the similarity of the assets and their useful lives. It provides formulas for calculating depreciation rates and composite life, along with instructions for handling asset disposals. Additionally, it includes illustrations of journal entries related to depreciation and disposal for specific equipment and an aircraft's components.

Uploaded by

maryannmanacap005
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Special Handout: Composite and Group Method ACC 211 [Intermediate Acc 2]

N.M. CUA – Instructor 1st Term / 2nd Semester 2024-2025

Group Method
Used when the PPEs comprising the group are similar and have almost the same length of useful lives. Composite method is used when the
PPEs comprising the group are dissimilar and have different length of useful lives.

Despite these perceived differences of circumstances between these methods, the relevant mathematical calculations under each method are
identical.

Depreciation Rate
To compute for the depreciation rate, the following formula is relevant:

𝑻𝒐𝒕𝒂𝒍 𝑨𝒏𝒏𝒖𝒂𝒍 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏


𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 𝑹𝒂𝒕𝒆 =
𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕 𝒐𝒇 𝑨𝒍𝒍 𝑷𝑷𝑬𝒔 𝒊𝒏 𝒕𝒉𝒆 𝑮𝒓𝒐𝒖𝒑

Total annual depreciation is the aggregate annual depreciation of each PPE computed using the straight-line method. To obtain the annual
amount of depreciation, the following formula is relevant:

Annual Depreciation = Total COST of all PPEs in the group * Depreciation Rate

Take note that the depreciation rate is NOT multiplied to the total depreciable cost.

Composite Life
Another relevant metric is the composite life, which is computed as follows:

𝑻𝒐𝒕𝒂𝒍 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 𝑪𝒐𝒔𝒕 𝒐𝒇 𝒂𝒍𝒍 𝒕𝒉𝒆 𝑷𝑷𝑬𝒔 𝒊𝒏 𝒕𝒉𝒆 𝒈𝒓𝒐𝒖𝒑


𝑪𝒐𝒎𝒑𝒐𝒔𝒊𝒕𝒆 𝑳𝒊𝒇𝒆 =
𝑻𝒐𝒕𝒂𝒍 𝑨𝒏𝒏𝒖𝒂𝒍 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏

Composite life simply means the number of years to fully depreciate the total depreciable cost of all the PPEs in the group.

Disposal of Assets
Whenever a PPE in the group is sold or retired, no amounts of gain or loss are to be recognized. |nstead, the cost of the derecognized PPE
is credited, while the debit will be to accumulated depreciation less proceeds, if there are any. This can be seen in the following pro-forma journal
entry:
Cash (if any) XX
Accumulated depreciation (squeeze) XX
Cost of sold or retired PPE XX

Consequently, the total accumulated depreciation account cannot be attributed specifically to each of the PPEs in the group, and as a result, the
carrying amount of each PPE cannot be computed.

Illustration 1. On January 1, 2023, Mondstadt Company acquired three machineries that are to be used as a group in one of the Company’s production
processes. The following information is relevant:
Cost Residual Value Useful Life
Equipment A 5,000,000 1,000,000 5 years
Equipment B 3,000,000 800,000 8 years
Equipment C 2,000,000 200,000 4 years
10,000,000 2,000,000

On December 31, 2025 Equipment B was sold for P800,000.

Prepare the Journal entry to record the depreciation and disposal on December 31, 2025.

Composite Method
This depreciation method is somewhat the opposite of the group (or composite) method. For the purposes of computing depreciation, the
group/composite method combines individual PPEs as a single PPE while the component depreciation splits a single PPE into separate
components. Component depreciation is mainly used when a component of PPE has a cost that is significant in relation to the total cost
of the PPE. [PAS 16.43].

A very good example is an aircraft, wherein the costs of engines, aircraft body and seats are normally significant in relation to the total cost of the
aircraft. In those cases, the components are separately depreciated as if they are separate items of PPE. Other items of PPEs to which the
component depreciation can be applied also include ships and complex machineries.

On the other hand, components with cost that is insignificant in relation to the total cost of the overall PPE are aggregated and depreciated
together. An entity may use approximation methods in depreciating these components. [PAS 16.46].
Illustration 2. . On January 1, 2023, Fontaine Company acquired an aircraft for a total cost of P30,000,000. This aggregate cost can be attributed to
aircraft’s components as follows:

Component Cost Useful Life


Aircraft frame 13,000,000 16 years
Engines 9,000,000 10 years
Seats and Internals 4,000,000 5 years
Miscellaneous 4,000,000 4 years
30,000,000

--- END OF HANDOUTS ---

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