## Straight-Line Method

### Learning Outcomes

• Compute depreciation using the straight-line method

To apply the straight-line method, a firm spreads the cost of the asset out across the asset’s useful life at a steady rate. The formula for calculating depreciation under the straight-line method is:

Depreciation Expense =  ( Cost − Salvage ) / Useful Life

Let’s 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.

Here is the list of fixed assets we created:

Asset Description Date Purchased Cost As of 12/31/20X1 Spivey Company 1 Land 2/1/20X1 262,800 4 Land 10/1/20X1 120,000 382,800 2 Building 7/1/20X1 490,000 5 Building 10/1/20X1 600,000 1,090,000 3 Machine 7/1/20X1 162,000 6 Delivery Van 10/1/20X1 45,000 7 Machine 10/1/20X1 99,500 8 Office Furniture 10/1/20X1 70,000 9 Computer 10/1/20X1 5,500 382,000 $1,854,800 We have two buildings to depreciate: 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. Depreciation Expense = ( Cost − Salvage ) / Useful Life ($490,000 − $49,000) / 40 =$11,025 cost allocated per year to the income statement, or $918.75 per month. The rate is 1/40, or 2.5% per year. 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 ½, 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.

The second building was purchased on October 1:

(600,000 − 60,000) / 40 = $16,000 per year, or$1,333.33 per month.

The first year’s depreciation expense would be $4,000 ($1,333.33 × 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:

Years Amount Total
1 (3 months) 4,000 4,000
2-40 16,000 624,000
41 (9 months) 12,000 12,000Single line
640,000Double line

We call the running total of depreciation expense “accumulated depreciation” and it will be equal to the historical cost less the estimated salvage value.