Brazil Group purchases a vehicle at a cost of $50,000 on January 2, 2012. Indivi
ID: 2389945 • Letter: B
Question
Brazil Group purchases a vehicle at a cost of $50,000 on January 2, 2012. 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
(a) Compute depreciation expense for 2012, assuming Brazil depreciates the vehicle as a single unit.
(b) Compute depreciation expense for 2012, assuming Brazil uses component depreciation.
(c) Why might a company want to use component depreciation to depreciate its assets?
Explanation / Answer
(a) If Brazil depreciate the vehicle as a single unit, then the cost of $50000 should be spreaded over the transmission of 5 years, which is 50000/5 = $10000 per year.
(b) If the vehicle is depreciated as component, then we have to calculate the depreciation rate by adding the individual component depreciation per year and divide the sum by total costs:
Depreciation per year
Tires 6000/2 = $3000
Transmission 10000/5 = $2000
Trucks 34000/10 = $3400
Total: $8400 per year
(c) The component method tend to avoid the chances of under or over depreciation. Every component in a single unit have different useful life. If we use a single rate of depreciation, this may not be able to reflect the actual useful life of the component. It is too simplified to depreciate as a single unit.
Hope this helps!