Question

The factors that need to be determined to compute depreciation are an asset's: a. Cost, residual value, and physical life. b. Fair value, residual value, and economic life. c. Cost, residual value, and service life. d. Cost, replacement value, and service life.

Answer 1

Answer:

Cost, residual value, and service life

Explanation:

The computation of depreciation requires three (3) inputs.

Cost: the acquisition cost of the asset

Residual value: the value at which the asset will be sold

Service life: the number of years the assets will be used by a company (also known as useful life).

Thus $Depreciation = \frac{Cost - Residual Value}{Service Life}$

Physical life will be inappropriate because the physical life includes not only the useful life of the asset in a company, but also the life of the asset when it is sold.

The fair value of an comes into play when the asset is revalued, usually for a sale. Replacement value is similar to fair value as it is the market value of the asset at a given point in time.