Straight-line depreciation

Definition: A method of calculating an asset’s annual depreciation which is accomplished by taking the asset’s original cost, subtracting the value the asset will have when the company no longer has use for it (ie, salvage value), and dividing the result by the useful life of the asset.

Example: For $5,000, Jamie purchases a heat transfer press that will allow her to go into the t-shirt embellishment business. She expects the machine to last her 10 years, at which time she’ll be able to sell it for $1,000. Assuming the machine will have no value at the end of its life, the annual straight-line depreciation is ($5,000 – $1,000) / 10 years, or $400.

Investeach explains: Straight-line depreciation is the simplest but least beneficial depreciation method companies can use. If the government allows, companies should take advantage of accelerated depreciation.

Riddle me this:

1. Under this method, how much does the calculated depreciation change from year to year?
2. What effect will a high salvage value have on the amount of annual depreciation that is calculated?
3. If the government allows, which type of depreciation is preferable to straight-line depreciation?

2017-10-01T21:06:25+00:00