CFA Level IFinancial Statement AnalysisMedium
A company purchases equipment for $500,000. It has an estimated useful life of 10 years and a salvage value of $50,000. Using the straight-line depreciation method, what is the depreciation expense for the third year?
- A$90,000
- B$50,000
- C$55,000
- D$45,000
Show answer & explanationAnswer & explanation
Correct answer: D. $45,000
Straight-line depreciation allocates an equal amount of depreciation expense to each year of an asset's useful life. The formula is (Cost - Salvage Value) / Useful Life. For this asset, ($500,000 - $50,000) / 10 years = $45,000 per year.
Why the other options are wrong
- A. This incorrectly uses a double-declining balance method or similar accelerated method.
- B. This incorrectly uses the salvage value as the annual depreciation.
- C. This incorrectly uses the cost divided by useful life, ignoring salvage value.
Straight-Line Depreciation
A depreciation method that allocates an equal amount of an asset's depreciable cost to each year of its useful life.
- Simplest and most common depreciation method.
- Depreciable cost = Asset Cost - Salvage Value.
- Annual Depreciation = (Cost - Salvage Value) / Useful Life.
Memory trick: Straight-line means a steady, even reduction over time, like drawing a line.