How is the term “depreciation” used in a news story about the resale value of electric cars?

A recent news story in USA Today was entitled “Depreciation hits electric cars hard.” According to USA Today, a Ford Focus Electric automobile will be worth about 20% of its initial $35,995 list price after five years, while a conventional Ford Focus (gas-engine) will be worth about 36% of its initial value. The 2013 Nissan Leaf is projected to have a residual value of 15% after five years, while the comparable Nissan Sentra SL compact would have a residual value of about 36%. Throughout the USA Today story, this loss in value over the five years is referred to as “depreciation.”

The reason given for the lower residual values for electric cars is that pure electrics have been slow to catch on in the resale market.  Customers are willing to buy new electric cars, but not used ones.

Questions

1. What is the definition of “depreciation” from an accounting standpoint?
2. Would the accounting depreciation for a Ford Focus gas-engine automobile differ from a comparable Ford Focus Electric automobile? Why or why not?
3. The story also refers to “residual value.”  What is residual value? Does this “residual value” referred to by USA Today have the same meaning as the “residual value” used in accounting depreciation calculations? Explain.

Instructor Resources

These resources are provided to give the instructor flexibility for use of Accounting in the Headlines articles in the classroom. The blog posting itself can be assigned via a link to this site OR by distributing the student handout below.  Alternatively, the PowerPoint file below contains a bullet point overview of the article and the discussion questions.  The YouTube video link below is a narration of the blog post article (no discussion questions are included in the YouTube video; those can be assigned separately.)

• Student handout (pdf) (contains entire blog posting + discussion questions)
• PowerPoint file (brief article overview + discussion questions)
• YouTube URL (narrated article in shareable YouTube link)

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