What effect does the residual value have on a long-lived asset's depreciable cost?

• A. It is only considered when the asset is sold, not during depreciation.
• B. It increases the depreciable cost by being added to the asset's cost.
• C. It has no effect on the depreciable cost.
• D. It reduces the depreciable cost by being subtracted from the asset's cost.

Answer: (D)

Verified step by step guidance

1. Understand the concept of depreciable cost: Depreciable cost is the portion of an asset's cost that is allocated as an expense over its useful life. It is calculated as the difference between the asset's original cost and its residual value.
2. Define residual value: Residual value (also known as salvage value) is the estimated amount that an asset is expected to be worth at the end of its useful life. This value is subtracted from the asset's cost to determine the depreciable cost.
3. Apply the formula for depreciable cost: The formula is: $\mathrm{Depreciable} \mathrm{Cost}=\mathrm{Asset} \mathrm{Cost} - \mathrm{Residual} \mathrm{Value}$. This shows that the residual value reduces the amount of cost that is depreciated over the asset's useful life.
4. Clarify the impact of residual value: Since the residual value is subtracted from the asset's cost, it reduces the total amount of cost that is allocated as depreciation expense over time.
5. Conclude the explanation: The correct answer is that the residual value reduces the depreciable cost by being subtracted from the asset's cost. This ensures that only the portion of the asset's cost that is expected to be used up during its useful life is depreciated.