[Anonymous]

I cant believe I am asking… but here’s the problem…

I have been studying leases like crazy… especially the whole issue of whether or not to depreciate an asset over the lease tern or economic life…

The question isn’t about leases… but simple straight line depreciation… the denominator of which is the useful life…

But I was looking at the salvage value… and I’m thinking… suppose I purchase a car for $20,000… and I plan to sell it after five years for $5,000… well, that gives me the numerator all fine and well…

The denominator is the problem…

If the car is going to be sold, then it must have a few more years life in it, say another five… so there’s the question – do I use the 5 years I’m going to own it, or the full 10 year life of the auto, in the denominator? I’m pretty sure it is the time I will be in possession of the car, but this is one of those simple hair splitting questions I dont want to have any doubt about whatsoever…

If you know the rules for determining the denominator in capital lease depreciation, then you might be able to see why I’m asking… I dont want to make the question more complex by talking about leases, so suffice it just to ask whether to use the full life of the car or merely the period of ownership prior to selling it…

[Anonymous]

1

[Anonymous]

You lost me at the third word…

Did some research, and it appears “useful life” is the opposite.. i.e. the five years the company will own it, not the full 10 year economic life…

“An estimate of how long one can expect to use an income-producing item in a trade or business setting. Useful life usually refers to the duration for which the item will be useful (to the business), and not how long the property will actually last.” — https://www.investopedia.com/terms/u/usefullife.asp

Again, it says “usually”, but I think if there is a distinction to be drawn (like in Capital Leases) then the lectures would probably bring it out…

It raises another interesting question though… suppose one was considering the second owner… the one who paid $5000 for it, and the econ life was originally expected to to 10 years, and the car was already 5 years old… could they depreciate it over 7 years? I'm thinking they could because these are estimates… but, again, just looking forward…

Ty.

Liam

[Anonymous]

Case 1: Is the 5 years is the original useful life of the car? Then after 5 years you determined the car has additional 5 years of useful life? Which will be considered as an accounting estimate?

Answer: Depreciate it using 5 years

Cost: $20000
Salvage value: $5000
Useful Life: 5 years
Annual Depreciation= 20000-5000/5=3000
Accumulated Depreciation in 5 years= 3000*5=15000$
Book Value=20000-15000=5000
Selling price=$5000
Book Value=Selling price= No gain/No Loss

Entry Sale:
Dr: Accumulated Dep 15000
Dr Cash 5000
Cr Car 20000

Case 2: The original useful life of the car is 10 years and you sell it after 5 years.
Answer: Depreciate it using 10 years
Cost $20000
Salvage Value: ?????? Not stated, Salvage value should be the amount at the end of the useful life not the time you plan to sell it. Lets say the salvage value at the end of 10 years would be 2000
Useful Life:10 years
Annual Depreciation= 20000-2000/10=1800
Accumulated Depreciation in 5 years=1800*5=9000
Book Value after 5 years=20000-9000=11000
Sell it for 5000$ after 5 years
Gain(Loss)= 11000-5000=6000 Loss

JE year 5(Sale)
Dr Accumulated Dep 9000
Dr Cash 5000
Dr Loss 6000
Cr Car 20000

Correct me if I am wrong or if I missed info/

[Missy]

Depreciation should be calculated based on how long the asset is useful to you. Doesn't matter at all how long the asset will last.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Missy]

Additionally the irs has rules about depreciation/useful lives, and for simplicity many companies use the allowed depreciation lives.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Anonymous]

My assumption is, the car is useful to the company for 10 years but they just plan to sell it after 5 years.

[Missy]

If they're only planning to own it 5 years, that's how long it's useful to the company. Not useful to a business once you don't own .

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Missy]

Think about the concept of matching revenue. Let's say you buy a machine that makes CD's. The machine would likely still work in 20 years, but you expect to make your last CD ever in 3 years (thanx iTunes!) Then you would depreciate over the three years it's going to generate revenue even though it would technically still be operational after that.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Anonymous]

Okay, i got your point. Maybe its just not clear to me.. I was thinking that the plan to sell came later after 5 years and the useful life known to the company is 10 years and after 5 years they decided to sell it. I analyzed it incorrectly. Yes, you're right, the car would be depreciated using 5 years.

[Author]

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