{"id":3625,"date":"2020-10-21T16:44:18","date_gmt":"2020-10-21T16:44:18","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-financialaccounting\/?post_type=chapter&#038;p=3625"},"modified":"2021-03-28T19:07:03","modified_gmt":"2021-03-28T19:07:03","slug":"straight-line-method","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/chapter\/straight-line-method\/","title":{"raw":"Straight-Line Method","rendered":"Straight-Line Method"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li style=\"font-weight: 400\">Compute depreciation using the straight-line method<\/li>\r\n<\/ul>\r\n<\/div>\r\nTo apply the straight-line method, a firm spreads the cost of the asset out across the asset\u2019s useful life at a steady rate. The formula for calculating depreciation under the straight-line method is:\r\n<p style=\"padding-left: 30px\">Depreciation Expense =\u00a0 ( Cost \u2212 Salvage ) \/ Useful Life<\/p>\r\nLet\u2019s say Spivey Company uses the straight-line method for buildings, using a useful life of 40 years. Now you, as the accountant, have determined that even at the end of 40 years, the buildings will have a salvage (also known as scrap or residual) value equal to 10% of the original cost in addition to whatever value the underlying land might have.\r\n\r\nHere is the list of fixed assets we created:\r\n<table class=\"fin-table gridded\"><caption>Fixed Assets<\/caption>\r\n<tbody>\r\n<tr>\r\n<td style=\"text-align: right\" colspan=\"4\"><strong>As of 12\/31\/20X1<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"text-align: center\" colspan=\"4\"><strong>Spivey Company<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"4\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Asset<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Date Purchased<\/th>\r\n<th scope=\"col\">Cost<\/th>\r\n<\/tr>\r\n<tr>\r\n<td>1<\/td>\r\n<td>Land<\/td>\r\n<td>2\/1\/20X1<\/td>\r\n<td>262,800<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>4<\/td>\r\n<td>Land<\/td>\r\n<td>10\/1\/20X1<\/td>\r\n<td>120,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<th colspan=\"3\" scope=\"row\"><strong>Total Land<\/strong><\/th>\r\n<td>382,800<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>2<\/td>\r\n<td>Building<\/td>\r\n<td>7\/1\/20X1<\/td>\r\n<td>490,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>5<\/td>\r\n<td>Building<\/td>\r\n<td>10\/1\/20X1<\/td>\r\n<td>600,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<th colspan=\"3\" scope=\"row\"><strong>Total Buildings<\/strong><\/th>\r\n<td>1,090,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>3<\/td>\r\n<td>Machine<\/td>\r\n<td>7\/1\/20X1<\/td>\r\n<td>162,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>6<\/td>\r\n<td>Delivery Van<\/td>\r\n<td>10\/1\/20X1<\/td>\r\n<td>45,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>7<\/td>\r\n<td>Machine<\/td>\r\n<td>10\/1\/20X1<\/td>\r\n<td>99,500<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>8<\/td>\r\n<td>Office Furniture<\/td>\r\n<td>10\/1\/20X1<\/td>\r\n<td>70,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>9<\/td>\r\n<td>Computer<\/td>\r\n<td>10\/1\/20X1<\/td>\r\n<td>5,500<\/td>\r\n<\/tr>\r\n<tr>\r\n<th colspan=\"3\" scope=\"row\"><strong>Total Machinery and Equipment<\/strong><\/th>\r\n<td>382,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<th colspan=\"3\" scope=\"row\">Total PP&amp;E<\/th>\r\n<td>$ 1,854,800<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWe have two buildings to depreciate:\r\n\r\nThe first building was purchased on July 1, 20X1 for $490,000 and has a salvage value of $49,000, and a useful life of 40 years.\r\n<p style=\"padding-left: 30px\">Depreciation Expense =\u00a0 ( Cost \u2212 Salvage ) \/ Useful Life<\/p>\r\n<p style=\"padding-left: 30px\">($490,000\u00a0\u2212 $49,000) \/ 40 = $11,025 cost allocated per year to the income statement, or $918.75 per month.<\/p>\r\nThe rate is 1\/40, or 2.5% per year.\r\n\r\nThe building was only in service for half of the year, so booking the depreciation monthly would result in $918.75 X 6 months = $5,512.50. If the depreciation was only booked at the end of the year, you would take the full year depreciation and prorate it by multiplying it by \u00bd, and you would get $5,512.50. Most companies book depreciation monthly using an automatic, recurring journal entry that is updated each time an asset is bought or sold.\r\n\r\nThe second building was purchased on October 1:\r\n<p style=\"padding-left: 30px\">(600,000 \u2212 60,000) \/ 40 = $16,000 per year, or $1,333.33 per month.<\/p>\r\nThe first year\u2019s depreciation expense would be $4,000 ($1,333.33 \u00d7 3 months) and then $16,000 every year thereafter for 39 years. In year 41, assuming the building is still in use, the last journal entries would be January through September and would total $12,000. Total depreciation would look like this:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement\">\r\n<tbody>\r\n<tr>\r\n<th scope=\"col\">Years<\/th>\r\n<th scope=\"col\">Amount<\/th>\r\n<th scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<tr>\r\n<td>1 (3 months)<\/td>\r\n<td>4,000<\/td>\r\n<td>4,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>2-40<\/td>\r\n<td>16,000<\/td>\r\n<td>624,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>41 (9 months)<\/td>\r\n<td>12,000<\/td>\r\n<td>12,000<span class=\"u-sr-only\">Single line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td>640,000<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWe call the running total of depreciation expense \u201caccumulated depreciation\u201d and it will be equal to the historical cost less the estimated salvage value.\r\n\r\n<\/div>\r\nhttps:\/\/youtu.be\/RHo_3kWaIJo\r\n<div class=\"textbox tryit\">\r\n<h3>PRACTICE QUESTION<\/h3>\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/23778\r\n\r\n[ohm_question hide_question_numbers=1]206028[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li style=\"font-weight: 400\">Compute depreciation using the straight-line method<\/li>\n<\/ul>\n<\/div>\n<p>To apply the straight-line method, a firm spreads the cost of the asset out across the asset\u2019s useful life at a steady rate. The formula for calculating depreciation under the straight-line method is:<\/p>\n<p style=\"padding-left: 30px\">Depreciation Expense =\u00a0 ( Cost \u2212 Salvage ) \/ Useful Life<\/p>\n<p>Let\u2019s say Spivey Company uses the straight-line method for buildings, using a useful life of 40 years. Now you, as the accountant, have determined that even at the end of 40 years, the buildings will have a salvage (also known as scrap or residual) value equal to 10% of the original cost in addition to whatever value the underlying land might have.<\/p>\n<p>Here is the list of fixed assets we created:<\/p>\n<table class=\"fin-table gridded\">\n<caption>Fixed Assets<\/caption>\n<tbody>\n<tr>\n<td style=\"text-align: right\" colspan=\"4\"><strong>As of 12\/31\/20X1<\/strong><\/td>\n<\/tr>\n<tr>\n<td style=\"text-align: center\" colspan=\"4\"><strong>Spivey Company<\/strong><\/td>\n<\/tr>\n<tr>\n<td colspan=\"4\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Asset<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Date Purchased<\/th>\n<th scope=\"col\">Cost<\/th>\n<\/tr>\n<tr>\n<td>1<\/td>\n<td>Land<\/td>\n<td>2\/1\/20X1<\/td>\n<td>262,800<\/td>\n<\/tr>\n<tr>\n<td>4<\/td>\n<td>Land<\/td>\n<td>10\/1\/20X1<\/td>\n<td>120,000<\/td>\n<\/tr>\n<tr>\n<th colspan=\"3\" scope=\"row\"><strong>Total Land<\/strong><\/th>\n<td>382,800<\/td>\n<\/tr>\n<tr>\n<td>2<\/td>\n<td>Building<\/td>\n<td>7\/1\/20X1<\/td>\n<td>490,000<\/td>\n<\/tr>\n<tr>\n<td>5<\/td>\n<td>Building<\/td>\n<td>10\/1\/20X1<\/td>\n<td>600,000<\/td>\n<\/tr>\n<tr>\n<th colspan=\"3\" scope=\"row\"><strong>Total Buildings<\/strong><\/th>\n<td>1,090,000<\/td>\n<\/tr>\n<tr>\n<td>3<\/td>\n<td>Machine<\/td>\n<td>7\/1\/20X1<\/td>\n<td>162,000<\/td>\n<\/tr>\n<tr>\n<td>6<\/td>\n<td>Delivery Van<\/td>\n<td>10\/1\/20X1<\/td>\n<td>45,000<\/td>\n<\/tr>\n<tr>\n<td>7<\/td>\n<td>Machine<\/td>\n<td>10\/1\/20X1<\/td>\n<td>99,500<\/td>\n<\/tr>\n<tr>\n<td>8<\/td>\n<td>Office Furniture<\/td>\n<td>10\/1\/20X1<\/td>\n<td>70,000<\/td>\n<\/tr>\n<tr>\n<td>9<\/td>\n<td>Computer<\/td>\n<td>10\/1\/20X1<\/td>\n<td>5,500<\/td>\n<\/tr>\n<tr>\n<th colspan=\"3\" scope=\"row\"><strong>Total Machinery and Equipment<\/strong><\/th>\n<td>382,000<\/td>\n<\/tr>\n<tr>\n<th colspan=\"3\" scope=\"row\">Total PP&amp;E<\/th>\n<td>$ 1,854,800<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>We have two buildings to depreciate:<\/p>\n<p>The first building was purchased on July 1, 20X1 for $490,000 and has a salvage value of $49,000, and a useful life of 40 years.<\/p>\n<p style=\"padding-left: 30px\">Depreciation Expense =\u00a0 ( Cost \u2212 Salvage ) \/ Useful Life<\/p>\n<p style=\"padding-left: 30px\">($490,000\u00a0\u2212 $49,000) \/ 40 = $11,025 cost allocated per year to the income statement, or $918.75 per month.<\/p>\n<p>The rate is 1\/40, or 2.5% per year.<\/p>\n<p>The building was only in service for half of the year, so booking the depreciation monthly would result in $918.75 X 6 months = $5,512.50. If the depreciation was only booked at the end of the year, you would take the full year depreciation and prorate it by multiplying it by \u00bd, and you would get $5,512.50. Most companies book depreciation monthly using an automatic, recurring journal entry that is updated each time an asset is bought or sold.<\/p>\n<p>The second building was purchased on October 1:<\/p>\n<p style=\"padding-left: 30px\">(600,000 \u2212 60,000) \/ 40 = $16,000 per year, or $1,333.33 per month.<\/p>\n<p>The first year\u2019s depreciation expense would be $4,000 ($1,333.33 \u00d7 3 months) and then $16,000 every year thereafter for 39 years. In year 41, assuming the building is still in use, the last journal entries would be January through September and would total $12,000. Total depreciation would look like this:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement\">\n<tbody>\n<tr>\n<th scope=\"col\">Years<\/th>\n<th scope=\"col\">Amount<\/th>\n<th scope=\"col\">Total<\/th>\n<\/tr>\n<tr>\n<td>1 (3 months)<\/td>\n<td>4,000<\/td>\n<td>4,000<\/td>\n<\/tr>\n<tr>\n<td>2-40<\/td>\n<td>16,000<\/td>\n<td>624,000<\/td>\n<\/tr>\n<tr>\n<td>41 (9 months)<\/td>\n<td>12,000<\/td>\n<td>12,000<span class=\"u-sr-only\">Single line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td>640,000<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>We call the running total of depreciation expense \u201caccumulated depreciation\u201d and it will be equal to the historical cost less the estimated salvage value.<\/p>\n<\/div>\n<p><iframe loading=\"lazy\" id=\"oembed-1\" title=\"Straight Line Depreciation Method\" width=\"500\" height=\"281\" src=\"https:\/\/www.youtube.com\/embed\/RHo_3kWaIJo?feature=oembed&#38;rel=0\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<div class=\"textbox tryit\">\n<h3>PRACTICE QUESTION<\/h3>\n<p>\t<iframe id=\"lumen_assessment_23778\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=23778&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_23778\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n<p><iframe loading=\"lazy\" id=\"ohm206028\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=206028&theme=oea&iframe_resize_id=ohm206028\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-3625\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Straight-Line Method. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":90270,"menu_order":8,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Straight-Line Method\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-3625","chapter","type-chapter","status-publish","hentry"],"part":766,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/3625","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/users\/90270"}],"version-history":[{"count":11,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/3625\/revisions"}],"predecessor-version":[{"id":6751,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/3625\/revisions\/6751"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/parts\/766"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/3625\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/media?parent=3625"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=3625"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/contributor?post=3625"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/license?post=3625"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}