• Explanation

Assets that last for more than one year are used and depreciated over their lives to earn revenue. Expense recognition Under accrual accounting, expenses must be recognized in the same period in which the related benefit (ie, revenue) is recognized. This concept is also known as the matching principle. requires that this use (ie, loss of value) be recorded as depreciation over the asset's entire life.

The accounting value of an asset at the beginning of its useful life is its cost. A depreciable asset usually has a salvage value Salvage value is the estimated value of a long-term asset at the end of its useful life. It is used to calculate the asset value that is depreciated during its useful life, and its periodic depreciation expense. (residual value), which is its estimated value at the end of its useful life. The difference between these two amounts (ie, cost − salvage value) is the depreciable base The total amount depreciated over an asset's life. It is calculated as the difference between an asset's cost and its salvage value (residual value). An asset's accumulated depreciation at the end of its useful life equals its depreciable base.: the total value used (depreciation recorded) over the asset's life.  The accumulated depreciation Accumulated depreciation is the cumulative amount of depreciation expense recorded in previous periods. at the end of an asset's life equals its depreciable base.

An asset's cost is based on the amount paid by the company acquiring it. As such, the buyer is responsible for their own accounting valuations (such as carrying value and salvage value) and is generally unaware of any such data from the previous owner. Therefore, data from the previous owner is not used by the new owner (Choices A, B, and D). Here, the depreciable base of the new asset to the purchaser is $120,000:

Note that the asset's life in years will be used when calculating annual depreciation expense but is not needed for the depreciable base.

Things to remember:
The depreciable base of an asset is its cost less its salvage value (residual value). These amounts are based on data from the new owner; information from the previous owner is not used after purchase.