Under straight-line depreciation, which formula gives the annual depreciation expense?

Under straight-line depreciation, which formula gives the annual depreciation expense?

• A. Cost divided by service life
• B. (Cost minus salvage value) divided by service life
• C. Cost plus salvage value divided by service life
• D. Salvage value divided by service life

Answer: (B)

Straight-line depreciation allocates the asset’s value evenly over its useful life by focusing on the amount that will actually be lost in value, not the total cost itself. The amount that can be depreciated is the cost minus the estimated salvage value—the amount you expect to recover at the end. Dividing that depreciable base by the service life gives the annual depreciation expense. So the formula is: (cost minus salvage value) divided by service life. Why this fits: it distributes only the portion of cost that will be consumed through use, evenly each year, after accounting for what you expect to recover later. Why the other formulas don’t fit: using cost divided by service life ignores salvage value and would overstate depreciation in many cases. Using salvage value divided by service life ignores most of the asset’s cost and understates depreciation. Adding salvage value to cost before dividing inflates the amount and double-counts the salvage value.

Straight-line depreciation allocates the asset’s value evenly over its useful life by focusing on the amount that will actually be lost in value, not the total cost itself. The amount that can be depreciated is the cost minus the estimated salvage value—the amount you expect to recover at the end. Dividing that depreciable base by the service life gives the annual depreciation expense.

So the formula is: (cost minus salvage value) divided by service life.

Why this fits: it distributes only the portion of cost that will be consumed through use, evenly each year, after accounting for what you expect to recover later.

Why the other formulas don’t fit: using cost divided by service life ignores salvage value and would overstate depreciation in many cases. Using salvage value divided by service life ignores most of the asset’s cost and understates depreciation. Adding salvage value to cost before dividing inflates the amount and double-counts the salvage value.