Question

Describe the Straight-line depreciation method. Explain a real lifebusiness example of an actual fixed asset being depreciated using the Straight-linedepreciation method.

Answer 1

• Straight Line Method of depreciation is that where the Fixed Asset is depreciated at a constant rate based on useful life of asset.

The amount of depreciation annually stays the same for all the years till the end of useful life of Asset, so long as there are no changes in the estimates of salvage value or useful life.

The formula used can be summed as : Straight Line Depreciation Expense = (Original cost – Salvage Value) / Useful life in years

• Example, Equipment purchased on Jan 1 for $ 400,000 Cash. Estimated useful life was estimated to be 5 years at the end of which the residual (or salvage) value will be equal to $ 40,000

Straight Line Depreciation expense (annual) will be calculated as follows:

A	Cost	$          400,000.00
B	Residual Value	$            40,000.00
C=A - B	Depreciable base	$          360,000.00
D	Life [in years]	5
E=C/D	Annual SLM depreciation	$            72,000.00

Depreciation expense for all the 5 years will be equal to $ 72,000 per year.