The formula to compute annual straight-line depreciation is: A)Depreciable cost divided by useful life in units. B)(Cost plus salvage value) divided by the useful life in years. C)(Cost minus salvage value) divided by the useful life in years. D)Cost multiplied by useful life in years. E)Cost divided by useful life in units.
The correct answer and explanation is:
The correct answer is:
C) (Cost minus salvage value) divided by the useful life in years.
Explanation:
Straight-line depreciation is one of the most commonly used methods to allocate the cost of an asset over its useful life. This method spreads the expense evenly across the years of the asset’s expected usage, making it straightforward and easy to calculate.
The formula for straight-line depreciation is: Annual Depreciation Expense=Cost of the Asset−Salvage ValueUseful Life in Years\text{Annual Depreciation Expense} = \frac{\text{Cost of the Asset} – \text{Salvage Value}}{\text{Useful Life in Years}}
Here’s a breakdown of the terms:
- Cost of the Asset: This is the initial purchase price or total cost of acquiring the asset, including expenses like transportation, installation, and setup.
- Salvage Value: This represents the estimated residual value of the asset at the end of its useful life. It’s the amount the company expects to recover when the asset is sold or scrapped.
- Useful Life in Years: This is the period during which the asset is expected to provide economic benefits to the business.
Why Option C is Correct:
- The formula focuses on allocating only the depreciable cost (cost minus salvage value) of the asset over its useful life.
- Dividing by the useful life in years ensures the depreciation expense is spread evenly over the entire period.
Why Other Options are Incorrect:
- Option A: Refers to units-of-production depreciation, not straight-line.
- Option B: Incorrect because it adds the salvage value instead of subtracting it.
- Option D: Multiplying cost by useful life does not calculate depreciation.
- Option E: Also applies to units-of-production depreciation.
Example:
If an asset costs $10,000, has a salvage value of $2,000, and a useful life of 8 years, the annual depreciation expense would be: 10,000−2,0008=1,000 per year.\frac{10,000 – 2,000}{8} = 1,000 \, \text{per year.}
This method ensures consistent expense recognition throughout the asset’s lifespan.