Fully Depreciated

Definition

Fully Depreciated refers to a condition wherein a fixed asset has been subjected to all the depreciation charges that accounting or tax regulations allow. At this point, the book value of the asset is equal to its residual value, or salvage value, if any. Despite being fully depreciated, the asset may still be operational and its market value could be higher or lower than the residual value recorded on the books.

Examples

Company Machinery: A company owns a piece of machinery which had an original cost of $100,000. After applying depreciation at a rate set by accounting standards over several years, the asset’s book value has decreased to $0. Though fully depreciated, the machinery continues to function and its market value might be $5,000 due to demand for used machinery.
Office Equipment: An office purchases a copier for $10,000, which is depreciated using the straight-line method over 5 years. After 5 years, the copier is fully depreciated, i.e., its book value is $0. However, the company continues to use the copier for another two years, even though its market value might be only $500 due to wear and tear.

Frequently Asked Questions (FAQs)

Q1: What happens to the asset after it is fully depreciated?

A1: Even after an asset is fully depreciated, it can still be used in operations. The asset remains on the books at its residual value, which may be zero or some salvage value if applicable. It will not undergo further depreciation charges, but it can still contribute to production or services.

Q2: Can the market value of a fully depreciated asset be higher than its residual value?

A2: Yes, the market value of a fully depreciated asset can be higher, lower, or equal to its residual value. This discrepancy arises because book values are based on accounting estimates and wear-and-tear assumptions, while market values are driven by current demand and supply conditions.

Q3: What is the significance of the residual value?

A3: The residual value (or salvage value) is the estimated remaining value of an asset at the end of its useful life, after it has been fully depreciated. It represents the amount the company expects to recover through selling or scrapping the asset.

Depreciation: The process of allocating the cost of a tangible asset over its useful life.
Residual Value: The estimated value of an asset at the end of its useful life.
Market Value: The amount for which an asset could be sold in the open market.
Fixed Assets: Long-term tangible assets used in the operations of a business, such as machinery, buildings, and vehicles.

Online Resources

Suggested Books for Further Studies

“Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
“Financial Accounting: An Introduction to Concepts, Methods and Uses” by Roman L. Weil, Katherine Schipper, Jennifer Francis
“Accounting for Fixed Assets” by Raymond H. Peterson

Fundamentals of Fully Depreciated: Accounting Basics Quiz

### What does it mean when an asset is fully depreciated? - [ ] The asset is no longer in use. - [x] All allowable depreciation charges have been applied. - [ ] The asset has been sold. - [ ] The market value of the asset is zero. > **Explanation:** An asset is considered fully depreciated when all allowable depreciation charges have been applied, even if it is still in use. ### Can a fully depreciated asset still have market value? - [x] Yes - [ ] No > **Explanation:** Yes, a fully depreciated asset can still have market value which can be higher or lower than its book value. ### Where is the fully depreciated asset carried on the financial statements? - [ ] At its original cost. - [ ] At its market value. - [x] At its residual value. - [ ] It is not shown once fully depreciated. > **Explanation:** It is carried on the books at its residual value, reflecting the estimated remaining value after full depreciation. ### When does depreciation stop being charged on an asset? - [x] When it is fully depreciated. - [ ] When it is sold. - [ ] When its market value drops. - [ ] When it is written off. > **Explanation:** Depreciation stops being charged once the asset is fully depreciated, meaning it has reached its residual value. ### What governs the amount of depreciation that can be charged? - [ ] Current market conditions. - [ ] Company discretion. - [x] Accounting standards and tax regulations. - [ ] Asset's color and size. > **Explanation:** Depreciation amounts are governed by accounting standards and tax regulations. ### Can a company still use a fully depreciated asset? - [x] Yes - [ ] No > **Explanation:** Yes, a company can continue to use a fully depreciated asset in operations. ### What is another term for residual value? - [ ] Market price. - [ ] Book value. - [x] Salvage value. - [ ] Net present value. > **Explanation:** Salvage value is another term used to describe residual value. ### What type of asset is typically subject to depreciation? - [x] Fixed assets. - [ ] Current assets. - [ ] Intangible assets. - [ ] Cash equivalents. > **Explanation:** Fixed assets, such as buildings and equipment, are typically subject to depreciation. ### What happens to the book value of the fully depreciated asset? - [ ] It becomes negative. - [x] It equals its residual value. - [ ] It is written off completely. - [ ] It reflects the market value. > **Explanation:** The book value becomes equal to the residual value once an asset is fully depreciated. ### Is the market value of a fully depreciated asset always lower than its original cost? - [ ] Yes - [x] No > **Explanation:** No, the market value of a fully depreciated asset can vary and may be higher or lower than its original cost depending on market conditions.

Thank you for exploring the concept of “Fully Depreciated” with us through this detailed overview and quiz. This comprehensive understanding of fixed assets and depreciation will aid you in honing your financial acumen.