How To Determine an Asset’s Salvage Value

salvage value

Book value is the total estimated value that a shareholder in a company receives if it is sold or liquidated at any moment of time. It is a metric that helps investors and analysts to evaluate if the stock is overpriced or underpriced when compared to actual fair market value. Salvage value is used by management to calculate annual depreciation in the accounting records and to calculate depreciation expense on the tax return.

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Other company assets, like vehicles, have a salvage value because they can be sold after their useful lives. At the end of the vehicle’s useful life, the company can sell the car for a small amount of money or sell it to a junkyard for parts.

Depreciation Methods

Total fixed assets and retained earnings would be understated on the balance sheet. Total fixed assets and retained earnings would be overstated on the balance sheet. ABC Company buys an asset for $100,000, and estimates that its salvage value will be $10,000 in five years, when it plans to dispose of the asset. This means that ABC will depreciate $90,000 of the asset cost over five years, leaving $10,000 of the cost remaining at the end of that time. ABC expects to then sell the asset for $10,000, which will eliminate the asset from ABC’s accounting records. If it is too difficult to determine a salvage value, or if the salvage value is expected to be minimal, then it is not necessary to include a salvage value in depreciation calculations.

For assets purchased in the middle of the year, the annual depreciation expense is divided by the number of months in that year since the purchase. The salvage value is necessarily an estimate of an asset’s value after it has been used over a period of time. A common method of estimating an asset’s salvage value is to estimate how much the asset could be sold for. Its salvage value in this case would be based on its estimated market value after it had been in use for a certain length of time. Since different owners might estimate different market values for an asset, standard values that have achieved industry acceptance are often used for salvage values.

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Thus, salvage value is used as a component of the depreciation calculation. The double-declining balance depreciation method is an accelerated method that multiplies an asset’s value by a depreciation rate. Straight line depreciation is generally the most basic depreciation method. It includes equal depreciation expenses each year throughout the entire useful life until the entire asset is depreciated to its salvage value. Companies take into consideration the matching principle when making assumptions for asset depreciation and salvage value.