FAR – Composite Depreciation Method Question

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  • #3302104
    jglypf
    Participant

    Can someone please help me understand this question?

    A company using the composite depreciation method for its fleet of trucks, cars, and campers retired one of its trucks and received cash from a salvage company. The net carrying amount of these composite asset accounts would be decreased by the

    Answer: Cash proceeds received

    The solutions approach is to prepare the journal entry that would be made when an asset is retired under the composite depreciation method.

    Cash (cash proceeds)
    Accumulated depreciation (plug)
    Truck original cost)
    The net decrease in the carrying amount of the assets is the credit to the asset account less the plug to accumulated depreciation. This amount would be equal to the cash proceeds received.

    I’m fully aware that no gain/loss will be recorded under the composite method. What I don’t understand is the wording of the question. Why does the net carrying amount of these asset accounts decrease by the amount of cash received?? Net carrying amount they’re asking is not the same as the original cost of the asset, is it? And how do you know if this is a gain or loss?

    #3302272
    RobOh
    Participant

    The carrying amount of a fixed asset is the Recorded Balance of the Asset less Accumulated Depreciation. As you stated, for composite depreciation you would not record any gain or loss. Therefore, when the asset cost and accumulated depreciation are both removed, the carrying amount of the asset accounts are decreased exactly by the cash proceeds. I agree, the wording is difficult to understand, but I guess that’s why this type of question shows up on the exam.

    FAR - 78

    BEC - 87

    REG - 82

    AUD - 82

    #3302338
    jglypf
    Participant

    Thanks for your reply. I understand the definition of the carrying amount. But I don’t get this:

    “when the asset cost and accumulated depreciation are both removed, the carrying amount of the asset accounts are decreased exactly by the cash proceeds.”

    I know you have to credit the original cost of the asset to remove since you’re retiring it and debit A/D because that’s where any gain/loss goes. So since the carrying amount is not the same as the original cost of the asset, in the example below, is the carrying amount 40 (100-60)?? If it is, I’m even more confused because if I apply that number to your concept, “carrying amount 40 is decreased exactly by cash proceeds 40”.

    Dr Cash proceeds 40
    Dr A/D 60
    Cr Asset 100

    #3302362
    CPAHOPE
    Participant

    You just answered your own question. Carrying amount is 40 because original cost – AD. Cash proceeds is 40 and the journal entry clearly depicts that.

    AUD - 73
    BEC - 76
    FAR - 80
    REG - 77
    FAR 57,61,57,56,68, 80

    REG 53,49,69,66, 79*,77

    AUD 39,66,72,73🤬

    BEC 64,60,50,70,67,71,76

    "Theres no limit unless you allow it"

    *expired

    #3302374
    jglypf
    Participant

    @CPAHOPE

    So applying my number to the question:

    The net carrying amount of these composite asset accounts (40) would be decreased by the cash proceeds received (40).

    I’m sorry but this is the part I don’t get. Can you dumb this down for me? If the net carrying amount 40 is decreased by cash proceeds 40, shouldn’t that be 0? If 40 is decreased by 40, that’s zero, right? 40-40=0 I hope I’m not overthinking this.

    #3302383
    CPAHOPE
    Participant

    Oh, think of it this way. You’re retiring one of the trucks so you credit 100. In return, you only receive cash of 40 since it was depreciated 60.

    AUD - 73
    BEC - 76
    FAR - 80
    REG - 77
    FAR 57,61,57,56,68, 80

    REG 53,49,69,66, 79*,77

    AUD 39,66,72,73🤬

    BEC 64,60,50,70,67,71,76

    "Theres no limit unless you allow it"

    *expired

    #3302386
    jglypf
    Participant

    I’m trying to understand what you’re saying but this keeps getting in the way:

    Carrying amount of the truck is decreased by A/D (not by cash proceeds) because:

    Cost of truck 100
    A/D 60
    = net carrying amount 40

    #3302416
    jglypf
    Participant

    If the carrying amount is decreased by the cash received it will be 60 not 40.

    Carrying amount 100 – cash received 40 = new carrying amount 60

    But 60 is A/D…

    #3302431
    CPAHOPE
    Participant

    I see your confusion. Carrying amount is used interchangeably with net carrying amount.

    AUD - 73
    BEC - 76
    FAR - 80
    REG - 77
    FAR 57,61,57,56,68, 80

    REG 53,49,69,66, 79*,77

    AUD 39,66,72,73🤬

    BEC 64,60,50,70,67,71,76

    "Theres no limit unless you allow it"

    *expired

    #3302470
    jglypf
    Participant

    So is it safe to think of it this way? I’m starting to give up on this question 🙁

    You decrease the net carrying amount by the cash received because you already retired the truck so you can’t record the proceeds since the asset is not active; therefore, we deduct the cash received.

    #3302611
    RobOh
    Participant

    @jglypf Lets not give up yet, maybe it will click if we do the journal entry and T account. Remember that composite depreciation is a group of assets. Lets say that on 1/1/XX the group of assets on the balance sheet for Trucks is $1,000 less Accumulated Depreciation of $300 so the net carrying value is $700.

    On 1/15/XX Truck A was retired and you received $40 for the truck which originally cost $100:
    Cash $40
    Accum Dep. $60
    Truck A $100

    Debits and Credits
    _________________________________________
    1/1/XX $1,000 | $300
    1/15/XX $60 | $100
    Total $660

    The net carrying value of Trucks after you retired Truck A is $660. The net carrying value was $700 before you retired Truck A so the carrying amount decreased $700 – $660 = $40 which is the exact amount of the cash proceeds.

    FAR - 78

    BEC - 87

    REG - 82

    AUD - 82

    #3302743
    monikernc
    Participant

    Google Alan Mursau, composite depreciation, and watch his you tube video. He will walk you through it. Guy was my hero while in school and has since passed away.
    I tried to post it but was blocked.

    AUD - 93
    BEC - 82
    FAR - 76
    REG - 88
    How have you been?
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    #3302899
    jglypf
    Participant

    @RobOh

    Thank you SO much for the detailed explanation!! I was finally able to understand! I had no idea this much work was involved to answer “seemingly easy” questions like this. I have a hard time understanding Wiley’s explanations because often times they’re not clear or confusing.

    Thanks again! 🙂

    #3303001
    RobOh
    Participant

    No problem, we have all been there. I also completely understand your frustration with Wiley as their text and solutions are not so clear and you could tell that they were written by different authors. I used them a few years ago and at that time I noticed many errors and they would agree that I was correct but they did not correct their text or solutions for a long time till after it was pointed out. Although it was a costly switch, I personally found Becker to be so much better as a review course. Don’t forget to take advantage of Ninja at least as a supplement to MCQ’s. @Monikernc provided a great resource above for Alan Mursau which has some great free videos. Jeff has also provided Ninjas for free lessons from the legend Bob Monette who was hands down the best instructor for the CPA exam until his passing, so the material could be dated but still extremely helpful.

    FAR - 78

    BEC - 87

    REG - 82

    AUD - 82

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