Question

[nacho]

I've got my sources, this IS on the exam.
- Referring to one Accounting principle, explain why residual value is deducted from Historical cost when calculating depreciation using the straight-line method.

I emailed them, they said:

Thanks very much for your question.
I have spoken to Anthony Simmons, the lead author of Cambridge VCE
Accounting Units 3 & 4, and he has said that the relevant principle is the
"entity" principle.
To explain this, when a business disposes of an asset (i.e. sells), any of its remaining value (residual value)
will be consumed by a separate entity.
The depreciable value must be the value consumed by the business, so taking the difference between the
purchase price (historical cost) and the sale price (residual value) keeps the entities of the company
and the purchaser separate, hence adhering to the entity principle.  

edit : jokes.

[ShortBlackChick]

Possible Answer?? (Help!!)
The residual value of the asset will not be consumed by the business and so must be deducted from the Historical cost to find the depreciable value that will be consumed by the current entity.
Im not sure what Principle it would be, perhaps Entity, or Going Concern, even Conservatism???
Right now, im leaning towards Entity. Because it makes more sense that the business take away the residual value as it will not be consumed by the business but rather the next owner, and the business and other business' are separate entities??

[123456k]

Reporting Period?

[ShortBlackChick]

Yeah i thought about that initially, but whats that got to do with deducting the residual value?? I thought Reporting Period would work sorta indirectly, if you want, because its about the reporting of depreciation rather than the calculation??

[123456k]

cost - scrap determines the cost value that will be consumed to enable the entity to generate future economic benefits from the non current asset. As the life of a non current asset is limited, it is reasonable to write part of its cost in each reporting period until it is sold or used up.

[123456k]

opinions?

[123456k]

oh doesn't the replied answer depend on how many marks its worth?

[soopertaco]

quick quick someone email neville box! haha
I'm leaning towards 123456k's answer a little but then i again i have no contribution to make seeing as i have no idea :p
i'll ask my teacher tomorrow nevertheless.
but judging by the nature of this question being so out there it may warrant some debate but may i ask if we even learn the reason for this?

[123456k]

LOL oh yeah~ but its take 24 hours to get a reply

[123456k]

Emailed him. now to wait for a response.

[Hodgeyhodgey]

Pretty sure I've heard this question somewhere before and the principle should be Entity, as the residual value is what won't be consumed by the business, therefore it is deducted from the historical cost and the remaining amount is divided by the useful life to determine the annual depreciation expense.

[123456k]

Question:
Referring to one Accounting principle, explain why residual value is deducted from Historical cost when calculating depreciation using the straight-line method.

my answer:
cost - scrap determines the cost value that will be consumed to enable the entity to generate future economic benefits from the non current asset. As the life of a non current asset is limited, it is reasonable to write part of its cost in each reporting period until it is sold or used up.

Neville Box himself : I would also mention the expected benefit to come into the business in the future reporting period when the asset is sold and the expected residual value is received (hopefully!)  Otherwise, all good!

I wish he was my accounting teacher.

[123456k]

read the edited post and you'll get it.

[Hodgeyhodgey]

Still don't quite get the answer..

So is the principle entity or reporting period? Sorry, I've had a big day with school and work meetings and this just isn't sinking in.

[123456k]

Yeah i guess so... That's all he said. but that might be related to what i was trying to say. Plus i don't think it's entity because it involves the business and the owner to be considered separate entities and all relevant items must be reported for a business entity. This has nothing to do with that. Maybe your getting it confused with qualitative characteristic relevamce? Maybe i'm wrong. However in neville box's lecture he mentioned that a few questions aren't limited to one response even though the vcaa try to do that kind of thing. He showed an example with a question that could of had the answer as relevance or reliability. He even said that some students were able to provide a better explanation than the vcca's answer. But if you think theres two possible answers then only write one or else you get penalised and get zero marks.