Depreciation expense is calculated using its cost, estimates of an asset's salvage value, and an estimated useful lifeGroup of answer choicesTrueFalse

Final Answer

True

Explanation

Depreciation expense represents the allocation of the cost of a tangible fixed asset over its useful life. To calculate it accurately, three key elements are essential:

1. Cost of the Asset: This is the total expenditure incurred to acquire the asset, including purchase price, taxes, delivery, and installation costs.

2. Salvage Value: This refers to the estimated residual value of the asset at the end of its useful life. It is the expected selling price after depreciation has been applied.

3. Estimated Useful Life: This is the period over which the asset is expected to be economically useful to the entity.

Using these three components, various methods such as straight-line depreciation or declination balance can be applied to determine the annual depreciation expense. The formula commonly used for straight-line depreciation is given by:

$\text{Depreciation Expense} = \frac{\text{Cost} - \text{Salvage Value}}{\text{Useful Life}}$

This clearly shows that the calculation of depreciation relies fundamentally on these estimates, making the statement true.