If residual value is revised upward, what happens to depreciation expense assuming cost and useful life unchanged?

If residual value is revised upward, what happens to depreciation expense assuming cost and useful life unchanged?

• A. Increases
• B. Decreases
• C. Remains unchanged
• D. Becomes zero

Answer: (B)

Depreciation expense is driven by the depreciable amount, which is the portion of cost expected to be consumed over the asset’s life (cost minus residual value). If you revise the residual value upward while cost and useful life stay the same, the depreciable amount shrinks. Under straight-line depreciation, annual expense is (cost − residual value) ÷ useful life, so a higher residual value reduces this quantity. The effect is lower depreciation expense in each year going forward, and the asset’s carrying amount will decline more slowly toward the revised residual value.

Depreciation expense is driven by the depreciable amount, which is the portion of cost expected to be consumed over the asset’s life (cost minus residual value). If you revise the residual value upward while cost and useful life stay the same, the depreciable amount shrinks. Under straight-line depreciation, annual expense is (cost − residual value) ÷ useful life, so a higher residual value reduces this quantity. The effect is lower depreciation expense in each year going forward, and the asset’s carrying amount will decline more slowly toward the revised residual value.