馃攳
Salvage Value (Scrap Value) - Meaning, Calculation with Depreciation Example - YouTube
Channel: WallStreetMojo
[10]
hello everyone hi welcome to the channel
of WallStreetmojo watch the video
[14]
till the end also if you are new to this
channel then you can subscribe us by
[18]
clicking the bell icon friends today we're going to learn a concept which is
[22]
known as the salvage value salvage value
is the important part of depreciation
[27]
when you calculate depreciation you
deduct salvage value and you divide by
[31]
the number of years of your term of
their life or the life of the asset so
[36]
let's understand this in the complete
detail format salvage value or the scrap
[39]
value is the value of any assets after
its useful life is over so let's say you
[44]
bought an asset today and after 5
years let's say that asset has it's not
[49]
actually in operational State so it has
almost lost its useful life now so after
[54]
that when you sell it as a scrap so what
is going to be its salvage value that's
[61]
that's what we are discussing here let's
understand this in a detail format
[64]
first we'll understand the nitty-gritty of
what is the salvage value see salvage
[71]
value or the scrap value is valued of an
asset is the value of an asset after
[75]
it's useful life is over like for
example if you buy a machinery
[83]
and if of a company and it has a life of
let's say 5 years and at the end of
[89]
the 5 years its value is let's say
only 5000 right at the end
[93]
let's say its value is only 5000 so 5000 over here it's
[98]
called as the salvage value right now
when a company purchases an asset like
[106]
first it calculates its salvage value of
the asset and thereafter you know this
[110]
this value is deducted from the total
cost of the assets and then the
[113]
depreciation is charged on the remaining
amount so it is very difficult to
[116]
calculate this value the normal practice
is to depreciate the assets on the total
[122]
cost basis on the total cost basis
considering its value as nil now there
[129]
is one issue with this concept since
this value is deducted before the
[133]
depreciation is charged what happens is
that people can use it as in a
[137]
fraudulent manner
now how let's understand see they
[141]
basically they can deduct more salvage
value as a result of the amount of the
[145]
depreciation would be reduced and that
means the profit of the company
[151]
will also increase significant right now
the another name of the salvage value is
[158]
also known as the scrap value it is also
known as this scrap value this is mere
[163]
estimate only no one knows what a piece
of equipment or machinery would cost
[167]
after let's say 10 years no one knows
that the piece of the asset may end up
[171]
in a junkyard as well right let's take a
salvage value example two and make you
[176]
understand in a more detailed format
let's say there is this company called
[180]
kg Inc it has purchased an equipment
let's say the equipment costing is
[187]
$1,00,000 right so the company finds
out that the useful life of the asset of
[193]
this equipment is let's say 10 years
from writing over here as the life at
[199]
the end of the 10 years now the value
of the equipment would be at the end of
[203]
the 10 years it would be 10000
only the salvage is 10000 as a
[210]
part of the scrap value so the over here
if the salvage is 10000 that means
[214]
your scrap value will also be 10000 so now as we know that the
[217]
value of the equipment is 10000
the depreciation of the equipment should
[220]
be calculated something like this is
equal to bracket your equipment but that
[227]
will be your equipment cost less your
salvage value divided by the life of the
[233]
asset once you do that you have your
answer
[236]
9000 as a part of the
depreciation right so let's have a look
[241]
at the formula of the salvage value the
salvage value which is which will the note
[246]
as s over here it will be calculated
something like this s that is a salvage
[252]
value is equal to P bracket 1 minus I
bracket closed and it will be raised to
[261]
Y raised to small Y so P over here it
denotes the original cost of the asset I
[273]
denotes your depreciation and Y in our
example which is raised to Y is the
[280]
number of to find out the scrap value
you first need to make sure that it
[284]
precision rate should be determined
along with along with that you know you
[287]
also need to know how many years the
acid will last that is useful life of
[292]
the asset let's take a detail example on
this lets it is a company again let's
[298]
say it's kg inc and it has some detail
which has let's say it has bought an
[303]
asset of $1,000,000 and they figured out
that the useful life of the asset would
[310]
be around let's say 20 years life is 20
years and the depreciation rate on which
[316]
they will depreciate of the asset would
be 20% let's say the depreciation
[320]
rate is standing at 20% so
what we need to find out over here is
[324]
the salvage value of the kg Inc just
purchased that is the asset which they
[329]
just purchased so in this example we
have been given the original price of
[332]
the asset which is standing at 1 million
the useful life of the assets which is
[335]
20 years and the depreciation which is
bird rated 20% so the salvage
[339]
value which by applying this particular
formula we will have something like this
[345]
that will be is equal to 1 minus your
depreciation is 20% so it will be
[351]
0.2 right of 1 million or we need to put
this in a bracket because we have thing
[359]
called raise to number of years which is
20 years as the life so this is our
[364]
answer
in terms of it will be this is closely
[368]
to 11,000 529 yeah
529 million so not million it is just
[374]
11,000 529 dollars right so this is the
example of how we found the salvage
[380]
value that is 1 minus the depreciation
right that is 20% sorry over here we use
[386]
the depreciation this 0.2 is your
depreciation which is 20%
[390]
so the depreciation rate divided by the
number of years now what is the salvage
[395]
value of any asset goes to 0 see what is
the salvage value for asset at the end
[399]
of the useful life is 0 what should we
do what should one do then see as for the
[403]
US income tax regulation while
depreciating any asset you need to
[408]
assume that the scrap value of the asset
would be 0 you have to assume that now
[412]
if you assume that this scrap value or
the salvage value is let's say 0 then we
[417]
can get the value
I mean no we can find that at the end of
[420]
the useful light we can get the value we
can account it as a gain of the company
[424]
instead of estimating it for far behind
now as a result there would be no
[428]
estimation error okay in finding out the
scrap value and no one would be able to
[432]
use this value as an excuse to encourage
or support fraudulent practices now how
[437]
is this crap value seen in the cost
accounting see remember one thing in cost
[442]
accounting the idea of this scrap value
is slightly different than that of the
[445]
cost of the financial accounting in cost
accounting this scrap value is the raw
[449]
material of the product that the
manufacturer will sell off as a scrap
[453]
that means that if if it has nothing to
do with the obsolescence of an assets
[458]
rather its new raw material there are no
value to the manufacturing company so on
[464]
the final end of the conclusion I'll say
that there is a confusion between the
[470]
salvage value and the scrap value and
the residual value so the three terms
[481]
right however if you see the scrap value
and the residual value are just the
[486]
other names of the salvage value in
accounting so to summarize it is the
[489]
value of any assets it's useful life is
over and scrap value is an estimated
[495]
figure so it can be calculated if you
can determine the depreciation rate and
[499]
the useful life so in the u.s. for the
purpose of tax purpose like you know for
[502]
tax purposes depreciation is calculated assuming the scrap value as zero so that's
[509]
it for this particular topic if you have
learned and enjoyed watching this video
[513]
please like and comment on this video
and subscribe to our channel for the
[518]
latest updates thank you everyone
Cheers
Most Recent Videos:
You can go back to the homepage right here: Homepage