Crash Course in Accounting and Financial Statement Analysis, Second Edition

Straight-Line Depreciation Method

Under the straight-line depreciation method, the depreciable cost of an asset is spread evenly over the asset’s estimated useful life.

Accordingly, depreciation expense for each period (quarter or year) is the same, and can be calculated as follows:

Annual Depreciation Expense

=

Original Cost less Salvage Value Useful Life

Where:

• Original Cost is the original cost of the asset.

• Salvage (Residual) Value is the physical asset’s estimated salvage/disposal/residual/trade-in value at the time of disposal. Original cost minus salvage value is often referred to as the depreciable cost.

• Useful Life is the total amount of time (usually in years) the asset is expected to remain in service. Useful life varies by asset types (asset classes).

10. Calculating Depreciation Expense Using the Straight-Line Method

Exercise Q1: A tire maker spends $100,000 in 2004 to acquire a piece of manufacturing equipment that is expected to be productive for the next five years. In 2009, the tire maker expects to sell it for $20,000. Calculate the annual depreciation expense using the straight-line depreciation method.

10. Calculating Depreciation Expense Using the Straight-Line Method

Solution 1: