Residual value/called scrap value of R1

When an asset's carrying value reaches £1, it can no longer be depreciated further. This principle ensures the book value of the asset does not fall below its minimal scrap value.

1. R1 Scrap Value Principle

When an asset's carrying value reaches R1, it cannot be depreciated any further.

• Example: A vehicle with a cost price of R100 000 and accumulated depreciation of R99 999 has a carrying value of R1 (100 000 – 99 999 = 1). In the ledger:

  • Vehicle Account (Debit balance) of R100 000
  • Accumulated Depreciation (Credit balance) of R99 999

2. Asset Disposal at R1

• If an asset has a carrying value of R1 when sold, both the cost price and total accumulated depreciation are transferred to the Asset Disposal account.
• Profit or Loss is then determined based on the scrap value of R1.
• For instance, if the vehicle's accumulated depreciation totals R99 999, and it is sold for R40 000, the profit on sale will be R39 999 (reflecting the R1 book value).

3. Selling Before Reaching R1

• In practice, if the asset is sold before its carrying value hits R1, the scrap-value rule may not be applied. Example:

  • A vehicle with a cost price of R100 000, accumulated depreciation of R90 000, and carrying value of R10 000 is sold for R40 000.
  • Even though depreciation is calculated at 20% on cost, the asset's carrying value cannot drop below R10 000 immediately just to reach R1.
  • In this scenario, the profit on sale is R40 000, because the R1 principle isn't used.

Key Points

• The Residual (Scrap) Value is the lowest allowable value at which an asset can be recorded on the books—often set at £1.
• Depreciation Limit - Depreciation stops once the carrying value hits £1; no further depreciation is calculated.
• Asset Disposal - If an asset with a £1 carrying value is sold, the cost and accumulated depreciation are transferred to the Asset Disposal account. Any profit or loss is determined based on the asset's final carrying value.
• Exceptions in Practice - Sometimes, when an asset is sold before reaching its £1 value, the principle isn't applied. In such cases, current market conditions or management decisions may override the theoretical scrap value.