Question

Would the useful life and/or amount of salvage value selected be verifiable?

Answer 1

The computation of depreciation is affected by three factors: cost, useful life, and salvage value. A longer useful life and higher expected salvage value will reduce the amount of annual depreciation expense in comparison to a shorter useful life and lower expected residual value. The decline in the depreciation expense of the asset would therefore increase net income. Retained earnings and total fixed assets will be overstated. The intentional manipulation of useful life and/or amount of salvage value in order to decrease the cost of depreciation and increase reported profits in order to induce others invest in a company or to do business will result to destroyed reputation. Thus it is amount to verify the useful life and/or amount of salvage value.