Help me please XYZ Co uses the straightline depreciation met

Help me please..

XYZ Co. uses the straight-line depreciation method for depreciable assets. All assets are depreciated individually except manufacturing machinery, which is depreciated by the composite method. Required: What factors should have influenced XYZ’s selection of the straight-line depreciation method? What benefits should derive from using the composite method rather than the individual basis for manufacturing machinery? How should XYZ have calculated the manufacturing machinery’s annual depreciation in its first year of operation?

Thank you!

Solution

Factors that influence for selection of straight-line method of depreciation:

1) straight line method matches with revenue and expenditure of XYZ Co.

2) Legal provision: The statue which is governing the enterprise may provide straight line method to use.

3)Financial reporting: The main purpose of reporting long term assests in financial statement is to show realistic position. but practically it is not possible. because we can not calculate actual expiration period of assets. But may be XYZ Co. calculate near to approx data that what will be the salvage value and life of assets so followed straight line method

4) Effect on managerial decision

5) Inflaton:Suppose one bought a car for Rs. 10,00,000 five years ago and wrote off Rs. 2,00,000 every year to account for depreciation using straight-line method, expecting that a new car can be purchased after five years. However, five years later, it is found that the same car costs Rs. 15, 00,000 whereas only Rs. 10, 00,000 has been saved through depreciation.

Why a new car or new asset cannot be purchased with the accumulated amount of depreciation? The difficulty has been created by the inflation. In fact, infraction has eaten into the money saved through depreciation over the five years. This means that a business enterprise (or the owner of car) eats into the asset faster than the rate of depreciation as the cost of replacing the asset is increasing.

Benefits of using composit depreciation method: 1. Since this method involve calculation of depreciation in total for all assets therfore it reduce the amount of manual accouting labour.

2.When there are so many parts of assets then calculation of individual assets depreciation is too lengthy process so to composite method help to reduce time in calculation.

3. easy to maintain records.

4. considered acceptable in practice.

Calculation of depreciation on manufacturing machinery\'s by using composite method:

Step 1: calculate depreciable cost of assets included in category of composite depreciation

Step2: Assign single useful to assets group

Step3: divide depreciable cost of step 1 by useful life in step2 to arrive total depreciation per year using straight line method

Step4: record the depreciation for the asset group

Step 4: recorde