Accounting theory and practice, Volume 2 (of 3) : a textbook for colleges and…

By original cost is meant full cost of the asset in position ready for use. By scrap value is meant the estimated value of the asset at the time of its discard, when removed from position and ready for sale or other mode of disposal. This is sometimes called its salvage value as distinguished from its value while still in position to render service but awaiting discard or break-up. By estimated service life is meant the time during which the asset will be used for service. This may be expressed in ordinary units of calendar time, such as the year; or in units of service time, such as working hours; or finally in units of output, such as tons, cubic feet, kilowatt hours, etc. Symbols to be Used For purposes of notation and reference the following symbols will be used: V = original cost V₁ = depreciated value at end of first period V₂ = ” ” ” ” ” second period Vₙ = ” ” ” ” ” last period, i.e., scrap value n = length of service life d = rate of depreciation per period D = total amount of depreciation, i.e., V - Vₙ D₁ = amount of depreciation during first period Dₙ = ” ” ” ” last ” r = rate of interest R = 1 + r, i.e., 100% plus the rate 1 - r = 100% minus the rate A = annual amount to be paid under the compound interest methods It should be noted that the foregoing factors are all estimates, with the exception of original cost, and that when making these estimates the principles of depreciation as discussed in preceding chapters must be taken into consideration. Thus, a decision must be made as to whether physical or functional depreciation is the controlling factor in determining service life. In the determination of service life, the policy as to repairs, renewals, and maintenance has a very important bearing. In fixing the scrap value, the relation of inadequacy, obsolescence, wear and tear, and age to the values remaining in the asset must be considered.