What is Residual value?
The residual value of an asset is usually estimated as its fair market value, as determined by agreement or appraisal.
For example: Let’s say a machine costing $15,000 has an estimated service life of 10 years, and at the end of its service life it can be sold as scrap metal to the dump for $2,000. If the cost of transporting the machine to the dump is $100, then the residual value of the machine is $1,900 ($2,000 value – $100 transportation costs).
Depreciating assets to their residual valueIf a fixed asset is depreciated over its useful life, then the asset’s residual value is the lowest value that it can be depreciated to.
If we take the machine from the example above for example, and depreciate it using the straight-line method, then we must first subtract the estimated residual value of $2,000 from the acquisition price of $15,000 before beginning depreciation.
The $13,000 remaining can then be divided and depreciated over the service life of the machine.