Multiple Choice
Which of the following best describes the relationship between an asset's estimated residual value and the total amount of depreciation recorded over its service life?
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8. Long Lived Assets
Depreciation: Summary of Main Methods
Multiple Choice
The depreciable cost of an asset is the asset's cost minus its estimated:
A
market value
B
salvage value
C
accumulated depreciation
D
book value
Verified step by step guidance1
Understand the concept of depreciable cost: Depreciable cost refers to the portion of an asset's cost that is allocated over its useful life for depreciation purposes. It is calculated by subtracting the estimated salvage value from the asset's total cost.
Define salvage value: Salvage value is the estimated residual value of an asset at the end of its useful life. It represents the amount the company expects to recover when the asset is sold or disposed of.
Clarify the formula for depreciable cost: The formula is: . This formula ensures that depreciation is calculated only on the portion of the asset's cost that will be consumed during its useful life.
Differentiate between other terms: Accumulated depreciation refers to the total depreciation expense recorded for an asset over time, while book value is the asset's cost minus accumulated depreciation. Neither of these terms is used in the calculation of depreciable cost.
Apply the concept: To calculate the depreciable cost of an asset, subtract the estimated salvage value from the asset's original cost. This value will then be used to allocate depreciation over the asset's useful life using methods such as straight-line or declining balance.
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