In computing depreciation, three values must be known or estimated; identify and explain the nature of each.
To compute depreciation, the three values that must be known or estimated are:
Cost—the actual total expenditures incurred in acquiring the asset in conformity with the cost principle.
Estimated useful life—the estimated length of time that the asset will be used by the present owner for the purposes for which it was acquired.
Residual value—the estimated amount of cash that is expected to be recovered at the end of the estimated useful life of the asset. The residual value is the estimated cash recovery amount minus the estimated cost of removing and disposing of the asset at the end of its estimated useful life.
Notice that, on the acquisition date, the first of these values is an actual known amount, while the latter two are estimates.
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