How is mid-year acquisition handled?

Prorate the first year's depreciation by the number of months the asset was in service. Divide the annual expense by 12, then multiply by the active months.

What happens if the salvage value estimate changes?

Do not adjust past depreciation. Calculate the new depreciable base (current book value minus new salvage value) and divide by the remaining useful life.

Can salvage value be zero?

Yes. If the asset is expected to have no resale or scrap value, $S = 0$, and the depreciable base equals the initial cost.

How to calculate straight-line depreciation

Straight-line depreciation allocates an equal amount of an asset's cost to depreciation expense for each year of its useful life. The method calculates periodic depreciation by subtracting the salvage value from the asset's initial cost, then dividing by the expected useful life.

This method applies to tangible fixed assets that degrade evenly over time, such as buildings, standard office equipment, and furniture. It is inappropriate for assets whose value declines rapidly in early years, like technology or vehicles, which require accelerated methods.

The setup

Identify three variables: Initial Cost ( $C$ ), Salvage Value ( $S$ ), and Useful Life ( $L$ ). The formula is $ext{Depreciation Expense} = \frac{C - S}{L}$ .

The steps

Determine the asset's initial cost, including all expenses to acquire and prepare it for use. 2. Estimate the salvage value at the end of its useful life. 3. Subtract salvage value from initial cost to find the depreciable base. 4. Divide the depreciable base by the useful life in years to determine the annual depreciation expense.

Checking the result

Multiply the annual depreciation expense by the useful life and add the salvage value. The result must equal the initial cost. At the end of the useful life, the asset's book value must exactly equal the salvage value.

Common errors

Failing to include shipping and installation costs in the initial cost $C$ . Depreciating the asset below its salvage value. Forgetting to prorate the depreciation for assets acquired mid-year.

Worked example

A company purchases a machine for $15,000. Shipping and installation cost$ 1,000. The estimated useful life is 5 years, after which it can be sold for $2,000. Calculate the annual depreciation expense and the book value after year 3.

Initial Cost $C = 15000 + 1000 = 16000$ . Salvage Value $S = 2000$ . Useful Life $L = 5$ . Depreciable Base = $C - S = 16000 - 2000 = 14000$ . Annual Depreciation = $\frac{14000}{5} = 2800$ . Accumulated Depreciation after 3 years = $2800 imes 3 = 8400$ . Book Value after year 3 = $C - ext{Accumulated Depreciation} = 16000 - 8400 = 7600$ .

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References: Financial Accounting, OpenStax · Intermediate Accounting (Kieso, Weygandt, Warfield)