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Straight Line Depreciation


Straight-line depreciation. There are many depreciation methods available to companies. Straight-line
depreciation is the method that companies most frequently use for financial reporting purposes. If straight-
line depreciation is used, an asset's annual depreciation expense is calculated by dividing the asset's
depreciable cost by the number of years in the asset's useful life.


Another way to describe this calculation is to say that the asset's depreciable cost is multiplied by the
straight-line rate, which equals one divided by the number of years in the asset's useful life.

Calculating Straight-Line Depreciation

Suppose a company purchases a $90,000 truck and expects the truck to have a salvage value of $10,000
after five years. The depreciable cost of the truck is $80,000 ($90,000 – $10,000), and the asset's annual
depreciation expense using straight-line depreciation is $16,000 ($80,000 ÷ 5).

Cost $90,000 Less: Salvage Value (10,000) Depreciable Cost $80,000

The following table summarizes the application of straight-line depreciation during the truck's five-year
useful life.

Straight-Line Depreciation

Depreciable Cost
Cost $90,000

Year 1 20% × $80,000 - $16,000 = $74,000

Year 2 20% × 80,000 = 16,000 = 80,000 - 32,000 = 58,000

Year 3 20% × 80,000 = 16,000 = 80,00 - 48,000 = 32000

Year 4 20% × 80,000 = 16,000 = 80,000 - 64,000 = 16000

Year 5 20% × 80,000 = 16,000 = 80,000 - 10,000

At the end of year five, the $80,000 shown as accumulated depreciation equals the asset's depreciable cost,
and the $10,000 net book value represents its estimated salvage value.

To record depreciation expense on the truck each year, the company debits depreciation expense–vehicles
for $16,000 and credits accumulated depreciation–vehicles for $16,000.


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