Nature Power Company uses the composite method and straight-line depreciation fo
ID: 2471346 • Letter: N
Question
Nature Power Company uses the composite method and straight-line depreciation for its power plant equipment. Its Apple River plant, which began generating electricity January 1, 2016 had the following equipment:
Equipment Life (years) Estimates Cost Residual Value
Turbines 25 $4,500,000 $500,000
Steam pipes 15 3,000.000 300,000
Furnace 20 6,000,000 0
1. Compute the composite depreciation rate.
2. Compute the average service life.
3. Compute 2016 depreciation.
Explanation / Answer
Equipment
Original Cost
Salvage Value
Depreciation Cost
Depreciation Life
SL Depreciation per Year
Turbines
4,500,000
500,000
4,000,000
25
160,000
Steam Pipes
3,000,000
300,000
2,700,000
15
180,000
Furnace
6,000,000
-
6,000,000
20
300,000
Total
13,500,000
800,000
12,700,000
640,000
Composite rate = Total depreciation per year / Total original cost
=640,000/13,500,000 x 100=4.74%
Composite life = Total depreciable cost / Total depreciation per year
=12,700,000/640,000=19.84 years
Composite Depreciation Expense = 13,500,000 x 4.74% = $639,900
Equipment
Original Cost
Salvage Value
Depreciation Cost
Depreciation Life
SL Depreciation per Year
Turbines
4,500,000
500,000
4,000,000
25
160,000
Steam Pipes
3,000,000
300,000
2,700,000
15
180,000
Furnace
6,000,000
-
6,000,000
20
300,000
Total
13,500,000
800,000
12,700,000
640,000
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