Multiple Choice
If a company uses the straight-line method to depreciate factory equipment, which of the following best describes how monthly depreciation expense is calculated?
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8. Long Lived Assets
Depreciation: Straight Line
Multiple Choice
Which of the following correctly states the formula for annual straight-line depreciation expense (assuming no change in estimates)?
A
B
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D
Verified step by step guidance1
Understand that straight-line depreciation spreads the cost of an asset evenly over its useful life.
Identify the key components needed: the asset's cost, its salvage value (residual value at the end of its useful life), and its useful life (in years).
Recall the formula for annual straight-line depreciation expense, which subtracts salvage value from cost to find the depreciable base, then divides by useful life:
\[ \text{Depreciation expense} = \frac{\text{Cost} - \text{Salvage value}}{\text{Useful life}} \]
Note that the formula \(\text{Depreciation expense} = \frac{\text{Cost}}{\text{Useful life}}\) ignores salvage value and is therefore incorrect for straight-line depreciation.
Also, recognize that depreciation expense is not calculated by multiplying cost by a depreciation rate unless that rate is derived from the straight-line method, and accumulated depreciation is not used as a divisor in the formula.
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