Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

8. Long Lived Assets

Depreciation: Straight Line

Financial Accounting

8. Long Lived Assets

Depreciation: Straight Line

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Multiple Choice

Which of the following represents the correct formula for calculating straight-line depreciation?

\( \text{Cost} \times \text{Depreciation Rate} \)

\( \text{(Cost} - \text{Salvage Value)} \div \text{Useful Life} \)

\( \text{(Cost} + \text{Salvage Value)} \div \text{Useful Life} \)

\( \text{Book Value} \times \text{Depreciation Rate} \)

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Verified step by step guidance

Understand the concept of straight-line depreciation: It is a method used to allocate the cost of an asset evenly over its useful life. The formula involves subtracting the salvage value (the estimated residual value of the asset at the end of its useful life) from the cost of the asset and dividing the result by the useful life of the asset.

Identify the components of the formula: The formula for straight-line depreciation is \( \text{(Cost} - \text{Salvage Value)} \div \text{Useful Life} \). Here, 'Cost' refers to the initial purchase price of the asset, 'Salvage Value' is the expected value of the asset at the end of its useful life, and 'Useful Life' is the estimated time period the asset will be used.

Compare the given options: Evaluate each option provided in the problem. The first option \( \text{Cost} \times \text{Depreciation Rate} \) is incorrect because it does not account for salvage value or useful life. The second option \( \text{(Cost} - \text{Salvage Value)} \div \text{Useful Life} \) matches the correct formula for straight-line depreciation. The third option \( \text{(Cost} + \text{Salvage Value)} \div \text{Useful Life} \) is incorrect because it adds salvage value instead of subtracting it. The fourth option \( \text{Book Value} \times \text{Depreciation Rate} \) is incorrect as it represents a different depreciation method (e.g., declining balance).

Explain why the correct formula works: Subtracting the salvage value ensures that only the depreciable amount of the asset is allocated over its useful life. Dividing by the useful life ensures the depreciation expense is spread evenly across each accounting period.

Conclude with the correct formula: The correct formula for calculating straight-line depreciation is \( \text{(Cost} - \text{Salvage Value)} \div \text{Useful Life} \). This formula ensures accurate and consistent allocation of the asset's cost over its useful life.