Joomla TemplatesBest Web HostingBest Joomla Hosting
Home Residual/Scrap Value

Articles

Residual/Scrap Value

Residual value is the estimated value of an asset at the end of its useful life. This value is the amount a company expects to sell. Residual value is estimated for tangible assets, and not intangible assets which mostly have no residual value. It is used in the calculation of depreciation and is the amount that is left after deducting total depreciation from the original cost of the asset.

Residual value = Cost – Total estimated depreciation. The total estimated depreciation charges are spread over the asset’s entire estimated useful life which usually lasts a few years.


Example 1

A company purchased an assembly plant for $140,000. The plant is estimated to have a useful life of 4 years. At the end of the life of the plant, the residual value (salvage value) will be $20,000. The company uses the straight line depreciation method.

Depreciation for year ended on December 31,


20X1
20X2
20X3
20X4
Total
Cost of plant ($)
140,000
140,000140,000140,000140,000
Less: Residual value ($)
20,000
20,00020,00020,00020,000
Depreciable cost ($)
120,000
120,000120,000120,000120,000
Useful life of plant (years)
4
4444
Depreciation charged ($)
30,000
30,00030,00030,000120,000


Example 2

On October 1, 20X1, a company purchased an assembly plant for $140,000. The plant is estimated to have a useful life of 4 years. At the end of the life of the plant, the residual value (salvage value) will be $20,000. The company uses the straight line depreciation method.

Depreciation for year ended on December 31,


20X1
20X2
20X3
20X4
20X5
Total
Cost of plant ($)
140,000
140,000 140,000 140,000 140,000
140,000
Less: Residual value ($)
20,000
20,000 20,000 20,000 20,000
20,000
Depreciable cost ($)
120,000
120,000 120,000 120,000 120,000
120,000
Useful life of plant (years)
4
4 4 4 4
4
Depreciation charged ($)
7,500*
30,000 30,000 30,000 22,500**
120,000

* 120,000/4 X 3/12 (Oct – Dec)
** Total depreciation cannot exceed depreciable cost of $120,000.

Last Updated (Saturday, 06 November 2010 15:15)