Nature Power Company uses the composite method and straight-line depreciation fo

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)   Estimated Cost      Residual Value     

Turbines   25    $5,200,000      $570,000       

Steam pipes   15    3,630,000      363,000       

Furnace   20    6,700,000      0       

Required:

1.   Compute the composite depreciation rate.

Explanation / Answer

Equipment Cost Residual Value Deprciable Base Life (Years) Straight Line Dep per Annum Turbines                  5,200,000                 570,000             4,630,000                    25                      185,200 Steam Pipes                  3,630,000                 363,000             3,267,000                    15                      217,800 Furnances                  6,700,000                             -               6,700,000                    20                      335,000 Total                15,530,000                 933,000          14,597,000                      738,000 Answer 1. Composite Depreciation Rate = 738,000 / 15,530,000 = 4.75% (Approx.) Answer 2. Average Service Life = 14,597,000 / 738,000 = 19.78 Years (approx) Answer 3. Depreciation Expense = 15,530,000 X 4.75% = $738000 (Approx.)

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