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Ch(4):Depreciation of Plant Assets91Factors in Computing DepreciationThree factors affect the computation of depreciation are:1.CostThe costof a plant assetconsists of all necessary and reasonable expenditures to acquire it and to prepare it for its intended use.2.Salvage Valuealsocalled residual value or scrap valueis an estimate of the asset%u2019s value at the end of its useful life. This is the amount the owner expected to be traded-in on new asset,its salvage value is the expected trade-in value.3.Useful Lifeuseful life is an estimate of theassetsexpected productive life, also calledservice lif. Useful life may be expressed in terms of time, units of activity (such as machine hours), or units of output. Useful life is an estimate.In making the estimateof useful life, management considers such factors as the intended use of the asset, its expected repair and maintenance, and its vulnerability to obsolescence. Past experience with similar assets is often helpful in deciding on expected useful life.Depreciation MethodsDepreciation is generally computed using one of the following methods:1.Straight-Line.2.Units-of-Production (Activity).3.Double Declining-Balance.Each method is acceptable under generally accepted accounting principles. Management selects the method it believes to be appropriate. The objective is to select the method that best measures an asset%u2019s contribution to revenue over its useful life. Once a company chooses a method, it should apply it consistently over the useful life of the asset. Consistency enhances the comparability of financial statements. Depreciation affects the balance sheet through accumulated depreciation and theincome statement through depreciation expense.