salvage value

Examples of salvage value in the following topics:

• Depreciation

  • The former affects values of businesses and entities.
  • Generally this involves four criteria: cost of the asset, expected salvage value (residual value of the asset), estimated useful life of the asset, and a method of apportioning the cost over such life.
  • Straight-line depreciation is the simplest and most often used technique, in which the company estimates the salvage value of the asset at the end of the period during which it will be used to generate revenue (useful life).
  • The salvage value (residual value or scrap value) is an estimate of the value of the asset at the time it will be sold or disposed of.
  • Under this method the book value is multiplied by a fixed rate.

• Factors for Calculating Depreciation

  • There are four main factors that affect the calculation of depreciation expense: asset cost, salvage value, useful life, and obsolescence.
  • The estimated salvage value of the asset.
  • Salvage value (or residual value) is the amount of money the company expects to recover, less disposal costs, on the date the asset is scrapped, sold, or traded in.
  • Ignore salvage value in making the calculations.
  • At the point where book value is equal to the salvage value, no more depreciation is taken.

• Methods of Depreciation

  • The straight-line formula used to calculate depreciation expense is: (asset's historical cost - the asset's estimated salvage value) / the asset's useful life.
  • The formula to calculate depreciation expense involves two steps: (1) determine depreciation per unit ((asset's historical cost - estimated salvage value) / estimated total units of production during the asset's useful life); (2) determine the expense for the accounting period (depreciation per unit X number of units produced in the period).
  • For example, suppose a business has an asset with a cost of 1,000, 100 salvage value, and 5 years useful life.
  • Apply the rate to the book value of the asset (cost subtracted by accumulated depreciation) and ignore salvage value.
  • At the point where book value is equal to the salvage value, no more depreciation is taken.

• Depreciation

  • The equipment is assumed to have a salvage value at the end of it's life of 10,000.
  • The straight-line method of depreciation reduces the book value of an asset by the same amount each period.
  • This amount is determined by dividing the total value of the asset, less its salvage value, by the number of periods in its useful life.
  • Since the declining balance method will never fully amortize the original cost of the asset, the salvage value is not considered in determining the annual depreciation.
  • Annual depreciation expense is equal to the original cost of the asset minus its salvage value, divided by the useful life of the asset.

• Depreciation

  • Depreciation refers to two very different but related concepts: the decrease in value of assets (fair value depreciation), and the allocation of the cost of assets to periods in which the assets are used (depreciation with the matching principle).
  • Fair value depreciation affects the values of businesses and entities.
  • the expected salvage value, also known as residual value of the asset
  • The cost of an asset so allocated is the difference between the amount paid for the asset and the salvage value.

• Risk Adjusting for the Time Horizon

  • Since stock investments have more time to overcome potential downturns in value, having a longer time horizon can justify more aggressive investing.
  • Also, an option to abandon, where management may have the option to cease a project during its life, and, possibly, to realize its salvage value.
  • Here, when the present value of the remaining cash flows falls below this salvage value, the asset may be sold.

• Uses of the Income Statement

  • The income statement also reflects the periodic decline in the value of fixed and intangible assets when depreciation and amortization expenses are reported.
  • The intangible asset goodwill is not subject to amortization but must be tested for impairment once a year; any reductions in value are reported as an impairment loss on the income statement.
  • Some numbers depend on judgments and estimates (e.g., depreciation expense depends on estimated useful life and salvage value)

• Impact of Depreciation Method

  • Assume a purchased truck is valued at $10,000, has a residual value of $5,000, and a useful life of 5 years.
  • Assume a piece of machinery is purchased for USD 100,000 with a residual value of $40,000 and a useful life of 5 years.
  • For year 4, the calculation uses the asset's book value  ($$100,000 - $20,000$) subtracted by its residual value ($$40,000$) and multiplied by the rate for year 4 $\left( \frac{4}{15} \right)$.
  • Ignore salvage value in making the calculations.
  • At the point where book value is equal to the salvage value, no more depreciation is taken.

• Resource Cost Write-Off

  • The term write-off describes removing an asset whose value is zero and is no longer in use from the balance sheet.
  • The term write-off describes a reduction in recognized value.
  • In accounting terminology, it refers to recognition of the reduced or zero value of an asset no longer in use.
  • When the asset has been depleted to a value of zero or its value has dropped to less than its salvage value, the asset's remaining book value, as calculated by the original historical cost minus the depletion of prior years, is removed from the balance sheet through a write-off.
  • When natural resources have their value reduced to zero they are written off.

• The Robinson Crusoe Example

  • His first set of choices is what to salvage from the wrecked ship.
  • Guns, powder, carpenter's tools, paper and ink are valued more highly than money.
  • His choice about which things to salvage (he cannot get all of the resources of the ship to shore on makeshift rafts) is partly an allocation problem and partly provisioning.
  • The natives of the neighboring islands have different beliefs, values and infrastructure (tools, knowledge, etc).
  • Since the story of Robinson Crusoe was written by an Englishman, Daniel Defoe (1659-1731), Crusoe's values are dominant and he has a greater influence on the decisions than Friday.