How to Compute Depreciation Using the Straight Line Method
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How to Compute Depreciation Using the Straight Line Method

The straight line method of depreciation is the simplest way to compute the depreciation of property, plant and equipment. It is used widely across different organizations due to its easy computation and presentation. In this article, we would take a look at 3 different problems in order to get acquainted on how to compute depreciation on a straight line basis.

Using the straight-line method is the easiest way to compute depreciation. The main formula used in the straight line method is:

Depreciable amount/estimated useful life = annual depreciation

To further understand how to compute depreciation using the straight line method, several problems are purebred below:

Problem 1

Jovy Company purchased machinery costing $20,000 on January 1, 2012. The past experience of the company that such equipment has a useful life of 5 years with no salvage value.

  1. Compute for the annual depreciation.
  2. What is the value of the machinery after one year?
  3. What is the accumulated depreciation as of December 31, 2014?
  4. What is the value of the machinery after five years?

To compute for the annual depreciation: 20,000/5=$4,000

As computed, the annual depreciation of the machinery is $4,000. This means that the value if the machinery will decrease by $4,000 yearly. Thus the value off the machinery after one year would be computed as follows:

cost of machinery      $20,000
Less: accumulated depreciation  4,000
Book value, Dec. 31, 2012    $16,000

Accumulated depreciation means the cumulative depreciation over the past years. January 01, 2012 to December 31, 2014 covers a period of three years thus the accumulated depreciation for December 31, 2014 could ba computed as follows:

$4,000 x 3 years = $12,000

This means that after three years, the value of the machinery would decrease by $12,000. After five years, the machinery would be considered fully depreciated, thus the value of the machine would already be $0.

Problem 2

Angel Corporation purchased a manufacturing equipment on April 1, 2012. The equipment has a list price of $35,000. The vendor of the equipment granted a trade discount of 10%. Freight costs incurred in relation to the purchased equipment amount to $400 and installation cost amounted to $600. The estimated useful life of the equipment is 10 years.

  1. What is the depreciation expense for the year ended December 31, 2012?
  2. What its the depreciation expense for the year ended December 31, 2013?
  3. What is the accumulated depreciation as of December 31, 2013?
  4. What is the book value of the equipment as of December 31, 2013?

Before computing depreciation, the total cost of the equipment should first be determined:

List price       $35,000
Less: Trade discount (35,000 x 10%)  3,500
Invoice price      $31,500
Add:   Freight-in   400
  Installation cost    600
Total Cost     $32,500

The depreciation for one year would then be computed as follows:

32,500/10=3,250

However, the machinery would not be depreciated for one whole year in 2012 since the purchase occurred in April 1 of the same year. The length of time between April 1 to December 31, 2012 is 9 months thus the equipment would be depreciated for 9 months only in the year 2012. The depreciation expense for 2012 would therefore be computed as follows:

3,250 x 9/12 = $2,437.50

The depreciation expense for the year ended December 31, 2013 would be the annual depreciation of $3,250 because the machinery would then be depreciated from January 1, 2013 to December 31, 2013.

The accumulated depreciation as of December 31, 2013 would be the depreciation for 2012 plus the depreciation for 2013. The computation would then be:

2,437.50 + 3,250 = 5,597.50

The book value of the equipment as of December 31, 2013 would be computed as follows:

Total Cost     $32,500
Less: Accumulated Depreciation 5,597.50
Book Value     $26,902.50

 Problem 3

Sarah Corporation purchased equipment on January 1, 2012 with a cost of $42,000. The equipment has an estimated useful life of 5 years a salvage value of $2,000. Prepare a depreciation table for the purchased equipment of Sarah Corporation.

To be able to prepare a depreciation shedule, we must first compute for the depreciable amount and the annual depreciation. The depreciable amount is the cost of the equipment less its salvage value.

Depreciable Amount: 42,000 - 2,000 = $40,000

Annual Depreciation: 40,000/5 years = $8,000

Depreciation Schedule:

Date Depreciation Expense Accumulated Depreciation Book Value
1-Jan-12     42,000
31-Dec-12 8,000 8,000 34,000
31-Dec-13 8,000 16,000 26,000
31-Dec-14 8,000 24,000 18,000
31-Dec-15 8,000 32,000 10,000
31-Dec-16 8,000 40000 2,000

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Comments (1)

When someone does something very well, it seems easy. You have that knowledge and skill to explain this so well for others to fully understand.thank you.

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