In straight-line depreciation, which components are included in the calculation?

• A. ACQUISITION PRICE minus SALVAGE VALUE divided by USEFUL LIFE
• B. Acquisition price divided by useful life
• C. Salvage value divided by useful life
• D. Original cost times depreciation rate

Answer: (A)

Depreciation under the straight-line method spreads the asset’s cost evenly over its useful life, and you base that annual amount on the part of the cost that will actually be consumed. The correct approach is to take the asset’s initial cost minus the expected salvage (residual) value, then divide by the useful life. This reflects that only the portion of cost that will be used up over time is expensed, while the salvage value is not.

If you only divide the acquisition price by useful life, you ignore salvage value and overstate annual depreciation. If you divide salvage value by useful life, you’re allocating value that isn’t the cost of the asset, which under- or misstates depreciation. If you multiply the original cost by a depreciation rate, you’re effectively applying a rate to the full cost without correctly accounting for salvage value (except in the special zero-salvage case), so it doesn’t match the standard straight-line formula.