Residual Value definition

The residual value or salvage value is the estimated amount that an entity expects to receive in the future for the sale of a property, plant, and equipment or an intangible after a certain period of use.

Residual value in property, plant and equipment

The residual value is calculated multiplied the total cost of an asset by an estimated percentage by the entity’s management.

 In other words, if a company acquires a building for 10 million and expects to sell it for one million after a time of use, this means that the salvage value is 10%.

Generally, the residual value of property, plant, and equipment is exclusive of the real states.

This is so because the assets with these characteristics tend to present valuations, while other types of assets, how the machines and the vehicles, tend to lose value.

This means that an asset, such as a building, will have some remaining value after a specific long time of use.

In change, it is very probable that a vehicle or a computer at the end of its useful life will have a value of null or almost null.

That is, a salvage value equal to zero.

Salvage value and depreciable amount

The depreciation of property, plant and equipment is the systematic distribution of the total cost of an asset throughout its useful life.

To determine this value first is necessary to establish the depreciable amount.

This is the total cost of an asset once deduced the residual value.

For example, an entity acquires a building for 2 million, with a useful life of 50 years and a residual value of 10%,

In this case, the depreciation that must be recognized in profit or loss each year is 36,000.

Then, the depreciable amount is equal to 1,800,000 (2,000,0000 – 200,000)

Depreciation expense = 1,800,000 / 50 years = 36,000

If the depreciation charge is associated with property and equipment construction or inventory production, an entity should not recognize a depreciation expense in profit or loss.

In contrast, an entity must account for this depreciation as a higher value of a fixed asset or an inventory. 

The residual value and depreciation of an asset

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