the municipal secretary desktop reference manual - Southwestern ...

! the asset's residual or salvage value - estimated at time the asset is acquired -- deducted
from the estimated salvage value is the cost (commonly called disposal costs) of
preparing the assets for sale, either by sealed bids or by auction. This value is not
changed during the asset's economic life.
The general formula for the value of the asset to be depreciated is:
original cost less salvage value less disposal cost = value to be depreciated.
Ideally, the depreciation method used should have some relationship to the decline in value
of the asset. There are several acceptable methods of calculating depreciation.
A building, for example, could logically be assumed to wear out fairly evenly over the years.
Thus, the straight-line method, which allocates depreciation equally over the life of the asset,
would be suitable.
A machine tool, however, might decline in service potential in about direct proportion to its
use. The service method would then be appropriate (machine hours in this case).
An automobile may last six years, but may lose more than half of its value in the first three
years. Some form of accelerated depreciation would be logical.
The depreciation method which is chosen is determined at the time an asset is acquired and it
is not changed during the life of the asset.
The development of depreciation programs also requires a user to make assumptions about
the flow of economic benefits over an asset's useful life. Different depreciation formulae must be
applied to account for differing types of benefit flows. In some instances, assets will render equal
benefit flows over their lives. Other assets, however, have characteristics which create unequal
benefit flows-greater flows take place in the asset's early years.
Many means have been devised for the numerous different possible depreciation situations
which exist in the environment. As a matter of convenience, however, a jurisdiction may want to
limit its use of depreciation methods to two or three. To recognize those assets whose benefits flow
evenly and uniformly over their economic lives, a straight-line depreciation method is most
appropriate. To account for the uneven flow of benefits, two means which provide for accelerated
depreciation are proposed: a service use method and a double declining balance method. See
Exhibits A, B and C. An asset is never depreciated below its residual value, even if it continues to
be used beyond its estimated service life.
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