LeBron James is not only a basketball superstar, but also a savvy businessman and investor. He has stakes in various companies, including a manufacturing corporation that bears his name. In this article, we will look at how to calculate the depreciation of the plant assets owned by LeBron James Manufacturing Corporation, using the composite method.
What is Depreciation?
Depreciation is the process of allocating the cost of a long-term asset over its useful life. Depreciation reduces the value of the asset on the balance sheet and creates an expense on the income statement. Depreciation helps to match the cost of the asset with the revenue it generates over time.
There are different methods of calculating depreciation, such as the straight-line method, the declining-balance method, and the units-of-production method. Each method has its own advantages and disadvantages, depending on the nature and usage of the asset.
What is the Composite Method?
The composite method is a way of calculating depreciation for a group of similar assets that have different individual costs, salvage values, and useful lives. The composite method simplifies the depreciation process by treating the group of assets as a single unit with a single depreciation rate.
The composite method has several benefits, such as:
- It eliminates the need to track the depreciation of each individual asset in the group.
- It allows for consistent and uniform depreciation charges over time, regardless of changes in individual assets.
- It avoids gains or losses on disposal of individual assets, as they are absorbed by the group.
How to Calculate Depreciation Using the Composite Method?
To calculate depreciation using the composite method, we need to follow these steps:
- Determine the total cost, salvage value, and useful life of each asset in the group.
- Calculate the composite depreciation rate by dividing the total annual depreciation of the group by the total cost of the group.
- Multiply the composite depreciation rate by the total cost of the group to get the annual depreciation expense for the group.
- Divide the annual depreciation expense by 12 to get the monthly depreciation expense for the group.
Let’s apply these steps to LeBron James Manufacturing Corporation, which owns five plant assets: A, B, C, D, and E. The information related to these assets is presented below:
|Asset||Cost||Salvage Value||Useful Life (in years)|
Using this information, we can calculate the depreciation for each asset using the straight-line method:
|A||($40,500 – $5,500) / 10 = $3,500|
|B||($33,600 – $4,800) / 9 = $3,200|
|C||($36,000 – $3,600) / 9 = $3,600|
|D||($19,000 – $1,500) / 7 = $2,500|
|E||($23,500 – $2,500) / 6 = $3,500|
Next, we can calculate the composite depreciation rate by adding up the annual depreciation of all assets and dividing it by the total cost of all assets:
Composite Depreciation Rate = ($3,500 + $3,200 + $3,600 + $2,500 + $3,500) / ($40,500 + $33,600 + $36,000 + $19,000 + $23,500) = 0.099
Then, we can multiply the composite depreciation rate by the total cost of all assets to get the annual depreciation expense for the group:
Annual Depreciation Expense = 0.099 x ($40,500 + $33,600 + $36,000 + $19,000 + $23,500) = $15,300
Finally, we can divide the annual depreciation expense by 12 to get the monthly depreciation expense for the group:
Monthly Depreciation Expense = $15,300 / 12 = $1.275
In this article, we have learned how to calculate depreciation using the composite method for a group of similar assets with different individual characteristics. We have applied this method to LeBron James Manufacturing Corporation and found that its monthly depreciation expense for its plant assets is $1.275.
We hope this article has been helpful and informative for you. If you have any questions or comments about this topic or any other accounting topics related to LeBron James Manufacturing Corporation, please feel free to contact us. We would love to hear from you.