- book value
- replacement value
- depreciable value
- market value
Total depreciation of an asset cannot exceed its?
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The total depreciation of an asset cannot exceed its 3. depreciable value.
Depreciable value means the original cost of the asset minus its residual/salvage value. The asset’s original cost is inclusive of the purchase price and other expenses incurred to make the asset operational. To put it simply,
The accumulated depreciation on an asset can never exceed its depreciable value because depreciation is a gradual fall in the value of an asset over its useful life. Only a certain percentage of the asset’s book value/original cost is shown as depreciation every year. So, it is impossible/illogical for the accumulated depreciation of an asset to exceed its depreciable value.
Let me show you an example to make it more understandable,
Amazon installs machines to automate the job of packing orders. The original cost of the machine is $1,000,000. Now let’s assume,
The estimated useful life of the machine – 10 years.
Residual value at the end of 10 years – $50,000.
Method of depreciation – Straight-line method.
The depreciable value of the machine will be $950,000 (1,000,000 – 50,000). The depreciation for each year under SLM will be calculated as follows:
Depreciation = (Original cost of the asset – Residual/Salvage Value) / (Useful life of the asset)
Applying this formula, $95,000 (1,000,000 – 50,000/10) will be charged as depreciation every year. The accumulated depreciation at the end of 10 years will be $950,000 (95,000*10). As you can see, the accumulated depreciation ($950,000) of the machine does not exceed its depreciable value ($950,000).
Thus, the total depreciation of an asset cannot be more than its depreciable value.