Question 7.2: A machine is purchased for $10,000. The forecasted salvage i...
A machine is purchased for $10,000. The forecasted salvage is $456, and the forecasted removal cost is $200. The expected useful life of the machine is four years. Compute the annual depreciation charge using the straight-line procedure.
(These figures will also be used for other methods discussed in this chapter.)
Annual Depreciation = \frac{(Initial Cost − Salvage + Removal Cost)}{Useful Life}=\frac{\$10,000-\$456+\$200}{4} = \frac{\$9,744}{4}= \$2,436. (7.1)
Using the straight-line procedure for the four-year period produces the
following results:
| Year | Book Value Beginning of Year | Depreciation Charge | Total Accumulated Depreciation | Book Value End of Year |
| 1 | $10,000 | $2,436 | $2,436 | $7,564 |
| 2 | 7,564 | 2,436 | 4,872 | 5,128 |
| 3 | 5,128 | 2,436 | 7,308 | 2,692 |
| 4 | 2,692 | 2,436 | 9,744 | 256 |
Note that the depreciation charge is the same every year, and the book value (initialcost minus accumulated depreciation) at the end of year 4 is equal to the anticipated salvage less removal cost.
The main advantages of the straight-line procedure are its simplicity and the fact that revenues of successive years are charged with equal amounts of depreciation.
The main disadvantage is that, given the assumptions of constant revenue and constant maintenance costs, the return on investment of the asset (income divided by the investment) will increase as the asset becomes older and the net book value decreases.
The basic simplicity of the straight-line procedure has caused it to be the most widely used depreciation procedure for accounting purposes.