Final answer:
Salvage value is the estimated residual value of an asset at the end of its useful life. It is used in calculating depreciation and is determined by considering factors like the asset's initial cost, useful life, expected wear and tear, and market value of similar assets. Accounting standards and expert evaluations can also play a role in estimating salvage value.
Step-by-step explanation:
What is Salvage Value?
Salvage value is the estimated residual value of an asset at the end of its useful life. It is the amount for which the asset can be sold once it is no longer useful for its intended purpose. The salvage value is important in calculating depreciation for an asset over its useful life.
Determining Salvage Value
To determine the salvage value for a particular asset, several factors need to be considered. These include:
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- The initial cost of the asset
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- The asset's useful life
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- The wear and tear the asset is expected to endure
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- The residual value of similar assets in the market
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- Regulatory or contractual obligations regarding disposal
Companies may employ experts or use historical data of similar asset sales to estimate salvage values. Accounting standards may also offer guidance on how to set these values. Nevertheless, the amount is often an estimate and may be adjusted as circumstances change over the asset's life.