[dferrari]

How can the selection of useful life and slavage value affect the financial statements?

Explain the concept of verifiability. Would the useful life and/or amount of salvage value selected be verifiable?

Thanks,
Deb

[Smith21000]

Let me provided you with some ideas here and then you can go from there. To answer your first question of useful life and salvage value, the shorter life chosen and the smaller salvage value used (if any), will increase your deprecation and accumulated depreciation which in turn will increase expenses and decrease your net fixed asset value. This is easy to see if you set-up some t-accounts and go over a couple scenarios using different lives and salvage values.

The concept of verifiability? I'm not sure what exactly your looking for here but if your talking about verifying actual lives and salvage values of the assets, this could be a tough one. I could be wrong, however I do not believe that actual useful lives are stated anywhere within GAAP literature, now this doesn't mean we can depreciation a building over 1 year, this would violate GAAP in that it would create an unreasonable perspective of the financial position of the company. We must be reasonable in our estimates and please note the I'm talking GAAP and not the IRS which is a different ball game. I ask you thou how would you verify the useful life of an asset or salvage value. No one can determine these items until the asset is obsolete/disposed of (useful life) or has been sold (salvage value). Let's give an example: We buy a computer for 500.00 and in my experience most companies will depreciate this computer over five years with no salvage value. Most likely at the time of purchase the company has no idea how long they will hold this asset and if there will be any chance of selling it when it comes time to dispose of it. Only when we dispose of the asset do we truly know what was the useful life was and what was the salvage value if it had any at all. Hope this help!