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Straight-line Method

DEFINITION

Method used to determine the useful life of an asset.

EXPLANATION

The straight-line method is the standard depreciation method used to reduce the carrying amount for a fixed asset over the lifetime of the product being depreciated. It is the preferred method because of its relative ease of use when compared to other methods.

Example

Sherwin purchased land and developed it into an apartment building. The value of the land is $400,000, while the costs of improvement are $2 million. What is the yearly appreciation deduction?

To calculate the depreciation deduction, you must begin with the cost of improvements which, in this case, is $2 million and divide it by 27.5 years and. This will then yield the depreciation deduction.

$2 million/27.5 years = $72,727.28

Investors in a partnership can deduct expenses up to the amount invested; however, losses cannot be used as depreciation. Losses include vacant units, below market rental rates, and other similar instances.

The straight-line method involves dividing the value of the property by the economic life of the property, which is the expected life of the property in years. The calculation helps determine the average yearly decrease in the property value. The rate of depreciation may decrease with good maintenance, repairs and keeping the property in good working condition. The calculation divides the cost and indicates the cost of decrease per year.

Example

A clothing manufacturing company purchases a property to expand its manufacturing business. They spend $600,000 to construct the factory to their specifications. The economic life of the building is projected at 50 years and the property is already 25 years old. The effective building age is 25 years. How much will the building depreciate over the next 25 years?

$600,000/50 = $12,000 depreciation per year

$12,000(25 years) = $300,000 total depreciation

Who Uses Straight Line Method And Why?

Accountants use depreciation as a way to gauge an assets expense over a long period of time. Companies will use this as a way to periodically extend the cost of assets, this allows them to use the asset without deducting it from their overall net income.

The straight line method is preferred by many accountants due to the ease that is associated with the formula as well as the lack of errors and cohesiveness of the expenses for every accounting period. Other methods such as double declining balance that uses numerous variables can become convoluted and inaccurate while calculating depreciation.

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