Straight Line Depreciation Formula

The straight line depreciation formula for an asset is as follows:

Where:

Cost of the asset is the purchase price of the asset

Salvage value is the value of the asset at the end of its useful life

Useful life of asset represents the number of periods/years in which the asset is expected to be
used by the company

Q1) Company A purchases a machine for $100,000 with an estimated salvage value of $20,000 and a
useful life of 5 years.

Q2) Equipment with a cost of $1,712,000 has an estimated salvage value of $32,000 and an
estimated life of 4 years or 42,000 hours. It is to be depreciated using the units-of-activity
method.

What is the amount of depreciation for the first full year, during which the equipment was used
for 8,700 hours?

a. $348,000.

b. $420,000.

c. $428,000.

d. $386,629

1. What is the depreciation expense using the straight line method on a asset costing 10,000 if it
has a useful life of 4 years and a salvage value of 2,000?

a. 2,500
b. 2,000
c. 5,000
2. If an asset has a useful life of 4 years, what is the annual straight line depreciation rate?
a. 25%
b. 33.33%
c. 20%
3. What is the depreciation expense using the straight line method on a asset costing 15,000 if it
has a useful life of 5 years and a salvage value of 3,000?
a. 4,000
b. 2,400
c. 3,000
4. If the annual depreciation expense using the straight line method is 1,500 and the asset has a
cost of 8,000 and a useful life of 3 years, what is the salvage value of the asset?
a. 3,000
b. 4,000
c. 3,500
5. If an asset has a cost of 6,000, a salvage value of 1,500, and the annual straight line method
depreciation expense is 1,125, what is the useful life of the asset?
a. 5 years
b. 3 years
c. 4 years
6. If the straight line method depreciation rate used on an asset is 5%, what is the expected useful
life of the asset?
a. 20 years
b. 5 years
c. 10 years
7. Another name for salvage value is?
a. Depreciable cost
b. Residual value
c. Net book value
8. Using the straight line method the depreciation expense each year is?
a. A fixed amount
b. A reducing amount
c. A variable amount
9. If an asset has a cost of 12,000 and a salvage value of 3,000, what is the depreciable cost using
the straight line method?
a. 9,000
b. 12,000
c. 3,000
10. If the depreciable cost of an asset is 16,000 and it has a useful life of 8 years, what is the
annual depreciation expense?
a. 2,500
b. 4,000
c. 2,000
What is the formula for the reducing balance method?

The reducing balance method formula in accounting is as follows:

Depreciation = Net book value x Depreciation rate (%)

What is the diminishing balance method in depreciation? Example

We explain the reducing balance method with residual value with an example below.

Let us assume an asset with an initial price of £12,000 and a useful life of 5 years. It is expected
that by the end of its use, the asset will have a residual value of £2,000. Further, we assume a
depreciation rate of 40%.

Period (years) Net book value (NBV) (£) at the beginning of the year Depreciation (£)

1 12,000 (12,000 – 2,000) * 0.4 = 4,000

2 12,000 – 4,000 = 8,000 (8,000 – 2,000) * 0.4 = 2,400

3 8,000 – 2,400 = 5,600 (5,600 – 2,000) * 0.4 = 1,440

4 5,600 – 1,440 = 4,160 (4,160 – 2,000) * 0.4 = 864

5 4,160– 864 = 3,296 (3,296 – 2,000) * 0.4 = 518.40

In the above example, the amount of depreciation falls in successive years. It starts at £4,000 in
the first year and eventually falls to £518.40. However, in this example, by the end of the fifth
year, the net book value becomes

Net book value at end of the year = £3,296- £518.40 = £2,777.60

But this book value is above the estimated residual value of £2,000. As a result, the depreciation
amount in the fifth year will be raised to £1,296. This is the difference between the net asset
value at the beginning of the year (£3,296) and the salvage value (£2,000). Thus, reproducing the
above table for the fifth year,

5 4,160– 864 = 3,296 3,296 – 2,000 = 1,296