Straight-line depreciation is the simplest depreciation method because it assumes assets lose value evenly throughout their lives. The annual depreciation rate is 100% divided by the useful life; for example, a five-year useful life asset has an annual depreciation rate of 100%/5 = 20%. The annual depreciation expense is the depreciation rate times the depreciable cost. A five-year asset purchased for $100,000 with an expected residual value of $10,000 has an annual depreciation expense of 0.2 x ($100,000- $10,000) ' After each year, the depreciation expense reduces the depreciable basis (for example, after the first year, the depreciable basis is

Straight-Line Depreciation Method:

A five-year asset purchased for $100,000 with an expected residual value of $10,000 has an annual depreciation expense of 0.2 x ($100,000- $10,000)__$18,000 ' After each year, the depreciation expense reduces the depreciable basis (for example, after the first year, the depreciable basis is__$72,000

Explanation:

a) Data and Calculations:

Asset's acquisition cost = $100,000

Residual value = $10,000

Useful life = 5 years

Depreciation rate = 20% (100/5)

Depreciable amount or basis = $90,000 ($100,000 - $10,000)

Depreciation expense for 1st year = 0.2 x ($100,000- $10,000) = $18,000

Depreciation basis after 1st year = $72,000 ($100,000 - $10,000 - $18,000)

b) The depreciation basis of a tangible long-term asset is the amount of the asset's cost that can be depreciated over its useful life.  This amount is the acquisition cost of an asset, minus its estimated salvage value at the end of its useful life.

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