{"id":237,"date":"2024-09-06T16:47:48","date_gmt":"2024-09-06T16:47:48","guid":{"rendered":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/chapter\/straight-line-method\/"},"modified":"2024-09-11T18:48:44","modified_gmt":"2024-09-11T18:48:44","slug":"straight-line-method","status":"publish","type":"chapter","link":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/chapter\/straight-line-method\/","title":{"raw":"Straight-Line Method","rendered":"Straight-Line Method"},"content":{"raw":"<section class=\"textbox learningGoals\" aria-label=\"Learning Goals\">\r\n<ul>\r\n \t<li>Compute depreciation using the straight-line method<\/li>\r\n<\/ul>\r\n<\/section>To apply the straight-line method, a firm spreads the cost of the asset out across the asset\u2019s useful life at a steady rate. The formula for calculating depreciation under the straight-line method is:\r\n<p style=\"padding-left: 30px;\">Depreciation Expense =\u00a0 ( Cost \u2212 Salvage ) \/ Useful Life<\/p>\r\nLet\u2019s 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.\r\n\r\nHere is the list of fixed assets we created:\r\n<table class=\"fin-table gridded\"><caption>Fixed Assets<\/caption>\r\n<tbody>\r\n<tr>\r\n<td style=\"text-align: right;\" colspan=\"4\"><strong>As of 12\/31\/20X1<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"text-align: center;\" colspan=\"4\"><strong>Spivey Company<\/strong><\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"4\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Asset<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Date Purchased<\/th>\r\n<th scope=\"col\">Cost<\/th>\r\n<\/tr>\r\n<tr>\r\n<td>1<\/td>\r\n<td>Land<\/td>\r\n<td>2\/1\/20X1<\/td>\r\n<td>262,800<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>4<\/td>\r\n<td>Land<\/td>\r\n<td>10\/1\/20X1<\/td>\r\n<td>120,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<th colspan=\"3\" scope=\"row\"><strong>Total Land<\/strong><\/th>\r\n<td>382,800<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>2<\/td>\r\n<td>Building<\/td>\r\n<td>7\/1\/20X1<\/td>\r\n<td>490,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>5<\/td>\r\n<td>Building<\/td>\r\n<td>10\/1\/20X1<\/td>\r\n<td>600,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<th colspan=\"3\" scope=\"row\"><strong>Total Buildings<\/strong><\/th>\r\n<td>1,090,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>3<\/td>\r\n<td>Machine<\/td>\r\n<td>7\/1\/20X1<\/td>\r\n<td>162,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>6<\/td>\r\n<td>Delivery Van<\/td>\r\n<td>10\/1\/20X1<\/td>\r\n<td>45,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>7<\/td>\r\n<td>Machine<\/td>\r\n<td>10\/1\/20X1<\/td>\r\n<td>99,500<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>8<\/td>\r\n<td>Office Furniture<\/td>\r\n<td>10\/1\/20X1<\/td>\r\n<td>70,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>9<\/td>\r\n<td>Computer<\/td>\r\n<td>10\/1\/20X1<\/td>\r\n<td>5,500<\/td>\r\n<\/tr>\r\n<tr>\r\n<th colspan=\"3\" scope=\"row\"><strong>Total Machinery and Equipment<\/strong><\/th>\r\n<td>382,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<th colspan=\"3\" scope=\"row\">Total PP&amp;E<\/th>\r\n<td>$ 1,854,800<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWe have two buildings to depreciate:\r\n\r\nThe 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.\r\n<p style=\"padding-left: 30px;\">Depreciation Expense =\u00a0 ( Cost \u2212 Salvage ) \/ Useful Life<\/p>\r\n<p style=\"padding-left: 30px;\">($490,000\u00a0\u2212 $49,000) \/ 40 = $11,025 cost allocated per year to the income statement, or $918.75 per month.<\/p>\r\nThe rate is 1\/40, or 2.5% per year.\r\n\r\nThe 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 \u00bd, 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.\r\n\r\nThe second building was purchased on October 1:\r\n<p style=\"padding-left: 30px;\">(600,000 \u2212 60,000) \/ 40 = $16,000 per year, or $1,333.33 per month.<\/p>\r\nThe first year\u2019s depreciation expense would be $4,000 ($1,333.33 \u00d7 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:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement\">\r\n<tbody>\r\n<tr>\r\n<th scope=\"col\">Years<\/th>\r\n<th scope=\"col\">Amount<\/th>\r\n<th scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<tr>\r\n<td>1 (3 months)<\/td>\r\n<td>4,000<\/td>\r\n<td>4,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>2-40<\/td>\r\n<td>16,000<\/td>\r\n<td>624,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>41 (9 months)<\/td>\r\n<td>12,000<\/td>\r\n<td>12,000<span class=\"u-sr-only\">Single line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td>640,000<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWe call the running total of depreciation expense \u201caccumulated depreciation\u201d and it will be equal to the historical cost less the estimated salvage value.\r\n\r\n<section class=\"textbox tryIt\" aria-label=\"Try It\">[ohm2_question hide_question_numbers=1]25184[\/ohm2_question]\r\n[ohm_question hide_question_numbers=1]206028[\/ohm_question]\r\n\r\n<\/section><\/div>","rendered":"<section class=\"textbox learningGoals\" aria-label=\"Learning Goals\">\n<ul>\n<li>Compute depreciation using the straight-line method<\/li>\n<\/ul>\n<\/section>\n<p>To apply the straight-line method, a firm spreads the cost of the asset out across the asset\u2019s useful life at a steady rate. The formula for calculating depreciation under the straight-line method is:<\/p>\n<p style=\"padding-left: 30px;\">Depreciation Expense =\u00a0 ( Cost \u2212 Salvage ) \/ Useful Life<\/p>\n<p>Let\u2019s 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.<\/p>\n<p>Here is the list of fixed assets we created:<\/p>\n<table class=\"fin-table gridded\">\n<caption>Fixed Assets<\/caption>\n<tbody>\n<tr>\n<td style=\"text-align: right;\" colspan=\"4\"><strong>As of 12\/31\/20X1<\/strong><\/td>\n<\/tr>\n<tr>\n<td style=\"text-align: center;\" colspan=\"4\"><strong>Spivey Company<\/strong><\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"4\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Asset<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Date Purchased<\/th>\n<th scope=\"col\">Cost<\/th>\n<\/tr>\n<tr>\n<td>1<\/td>\n<td>Land<\/td>\n<td>2\/1\/20X1<\/td>\n<td>262,800<\/td>\n<\/tr>\n<tr>\n<td>4<\/td>\n<td>Land<\/td>\n<td>10\/1\/20X1<\/td>\n<td>120,000<\/td>\n<\/tr>\n<tr>\n<th colspan=\"3\" scope=\"row\"><strong>Total Land<\/strong><\/th>\n<td>382,800<\/td>\n<\/tr>\n<tr>\n<td>2<\/td>\n<td>Building<\/td>\n<td>7\/1\/20X1<\/td>\n<td>490,000<\/td>\n<\/tr>\n<tr>\n<td>5<\/td>\n<td>Building<\/td>\n<td>10\/1\/20X1<\/td>\n<td>600,000<\/td>\n<\/tr>\n<tr>\n<th colspan=\"3\" scope=\"row\"><strong>Total Buildings<\/strong><\/th>\n<td>1,090,000<\/td>\n<\/tr>\n<tr>\n<td>3<\/td>\n<td>Machine<\/td>\n<td>7\/1\/20X1<\/td>\n<td>162,000<\/td>\n<\/tr>\n<tr>\n<td>6<\/td>\n<td>Delivery Van<\/td>\n<td>10\/1\/20X1<\/td>\n<td>45,000<\/td>\n<\/tr>\n<tr>\n<td>7<\/td>\n<td>Machine<\/td>\n<td>10\/1\/20X1<\/td>\n<td>99,500<\/td>\n<\/tr>\n<tr>\n<td>8<\/td>\n<td>Office Furniture<\/td>\n<td>10\/1\/20X1<\/td>\n<td>70,000<\/td>\n<\/tr>\n<tr>\n<td>9<\/td>\n<td>Computer<\/td>\n<td>10\/1\/20X1<\/td>\n<td>5,500<\/td>\n<\/tr>\n<tr>\n<th colspan=\"3\" scope=\"row\"><strong>Total Machinery and Equipment<\/strong><\/th>\n<td>382,000<\/td>\n<\/tr>\n<tr>\n<th colspan=\"3\" scope=\"row\">Total PP&amp;E<\/th>\n<td>$ 1,854,800<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>We have two buildings to depreciate:<\/p>\n<p>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.<\/p>\n<p style=\"padding-left: 30px;\">Depreciation Expense =\u00a0 ( Cost \u2212 Salvage ) \/ Useful Life<\/p>\n<p style=\"padding-left: 30px;\">($490,000\u00a0\u2212 $49,000) \/ 40 = $11,025 cost allocated per year to the income statement, or $918.75 per month.<\/p>\n<p>The rate is 1\/40, or 2.5% per year.<\/p>\n<p>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 \u00bd, 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.<\/p>\n<p>The second building was purchased on October 1:<\/p>\n<p style=\"padding-left: 30px;\">(600,000 \u2212 60,000) \/ 40 = $16,000 per year, or $1,333.33 per month.<\/p>\n<p>The first year\u2019s depreciation expense would be $4,000 ($1,333.33 \u00d7 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:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement\">\n<tbody>\n<tr>\n<th scope=\"col\">Years<\/th>\n<th scope=\"col\">Amount<\/th>\n<th scope=\"col\">Total<\/th>\n<\/tr>\n<tr>\n<td>1 (3 months)<\/td>\n<td>4,000<\/td>\n<td>4,000<\/td>\n<\/tr>\n<tr>\n<td>2-40<\/td>\n<td>16,000<\/td>\n<td>624,000<\/td>\n<\/tr>\n<tr>\n<td>41 (9 months)<\/td>\n<td>12,000<\/td>\n<td>12,000<span class=\"u-sr-only\">Single line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td>640,000<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>We call the running total of depreciation expense \u201caccumulated depreciation\u201d and it will be equal to the historical cost less the estimated salvage value.<\/p>\n<section class=\"textbox tryIt\" aria-label=\"Try It\"><iframe loading=\"lazy\" id=\"ohm25184\" class=\"resizable\" src=\"https:\/\/ohm.one.lumenlearning.com\/multiembedq.php?id=25184&theme=lumen&iframe_resize_id=ohm25184&source=tnh\" width=\"100%\" height=\"150\"><\/iframe><br \/>\n<iframe loading=\"lazy\" id=\"ohm206028\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=206028&theme=lumen&iframe_resize_id=ohm206028&source=tnh\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/section>\n<\/div>\n","protected":false},"author":6,"menu_order":8,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Straight-Line Method\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"part":229,"module-header":"- Select Header -","content_attributions":[{"type":"original","description":"Straight-Line Method","author":"Joseph Cooke","organization":"Lumen Learning","url":"","project":"","license":"cc-by","license_terms":""}],"internal_book_links":[],"video_content":null,"cc_video_embed_content":{"cc_scripts":"","media_targets":[]},"try_it_collection":null,"_links":{"self":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/237"}],"collection":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/users\/6"}],"version-history":[{"count":2,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/237\/revisions"}],"predecessor-version":[{"id":902,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/237\/revisions\/902"}],"part":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/parts\/229"}],"metadata":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/237\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/media?parent=237"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=237"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/contributor?post=237"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/license?post=237"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}