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# The Straight-Line Method

Under this simple and popular approach, the annual depreciation is calculated by dividing the depreciable base by the service life. An asset that has a \$100,000 cost, \$10,000 salvage value, and a four-year life would produce the following amounts:

 Depreciation Expense Accumulated Depreciation at End of Year Annual Expense Calculation Year l \$22,500 \$22,500 (\$100,000 - \$10,000)/4 Year 2 \$22,500 \$45,000 (\$100,000 - \$10,000)/4 Year 3 \$22,500 \$67,500 (\$100,000 - \$10,000)/4 Year 4 \$22,500 \$90,000 (\$100,000 - \$10,000)/4

For each of the above years, the journal entry to record depreciation is as follows:

 12-31-XX Depreciation Expense 22,500 Accumulated Depreciation 22,500 To record annual depreciation expense

The applicable depreciation expense would be included in each year's income statement (except in a manufacturing environment where some depreciation may be assigned to the manufactured inventory, as will be covered in the managerial accounting chapters later in this book series). The appropriate balance sheet presentation would appear as follows (end of year 3 in this case):

Equipment \$ 100,000

Less: Accumulated depreciation on equipment (67,500) 32,500

## Fractional Period Depreciation

Assets may be acquired at other than the beginning of an accounting period, and depreciation must be calculated for a partial period. With the straight-line method the amount is simply a fraction of the annual amount. For example, an asset acquired on the first day of April would be used for only nine months during the first calendar year. Therefore, year one depreciation would be 9/12 of the annual amount. Following is the depreciation table for the above asset, this time assuming an April 1 acquisition date:

 Expense Accumulated Depreciation End of Year Depreciation at Annual Expense Calculation Year 1 \$16,875 \$16,875 ((\$100,000 - \$10,000)/4) X 9/12 Year 2 \$22,500 \$39,375 (\$100,000 - \$10,000)/4 Year 3 \$22,500 \$61,875 (\$100,000 - \$10,000)/4 Year 4 \$22,500 \$84,375 (\$100,000 - \$10,000)/4 Year 5 \$ 5,625 Not applicable - assumed disposed ((\$100,000 - \$10,000)/4) X 3/12 on March 31