• Compute depreciation using the straight-line method

To apply the straight-line method, a firm spreads the cost of the asset out across the asset’s useful life at a steady rate. The formula for calculating depreciation under the straight-line method is:

Depreciation Expense =  ( Cost − Salvage ) / Useful Life

Let’s say Spivey Company uses the straight-line method for buildings, using a useful life of 40 years. Now you, as the accountant, have determined that even at the end of 40 years, the buildings will have a salvage (also known as scrap or residual) value equal to 10% of the original cost in addition to whatever value the underlying land might have.

Here is the list of fixed assets we created:

Fixed Assets

As of 12/31/20X1
Spivey Company
Asset	Description	Date Purchased	Cost
1	Land	2/1/20X1	262,800
4	Land	10/1/20X1	120,000
Total Land			382,800
2	Building	7/1/20X1	490,000
5	Building	10/1/20X1	600,000
Total Buildings			1,090,000
3	Machine	7/1/20X1	162,000
6	Delivery Van	10/1/20X1	45,000
7	Machine	10/1/20X1	99,500
8	Office Furniture	10/1/20X1	70,000
9	Computer	10/1/20X1	5,500
Total Machinery and Equipment			382,000
Total PP&E			$ 1,854,800

We have two buildings to depreciate:

The first building was purchased on July 1, 20X1 for $490,000 and has a salvage value of $49,000, and a useful life of 40 years.

Depreciation Expense =  ( Cost − Salvage ) / Useful Life

($490,000 − $49,000) / 40 = $11,025 cost allocated per year to the income statement, or $918.75 per month.

The rate is 1/40, or 2.5% per year.

The building was only in service for half of the year, so booking the depreciation monthly would result in $918.75 X 6 months = $5,512.50. If the depreciation was only booked at the end of the year, you would take the full year depreciation and prorate it by multiplying it by ½, and you would get $5,512.50. Most companies book depreciation monthly using an automatic, recurring journal entry that is updated each time an asset is bought or sold.

The second building was purchased on October 1:

(600,000 − 60,000) / 40 = $16,000 per year, or $1,333.33 per month.

The first year’s depreciation expense would be $4,000 ($1,333.33 × 3 months) and then $16,000 every year thereafter for 39 years. In year 41, assuming the building is still in use, the last journal entries would be January through September and would total $12,000. Total depreciation would look like this: