How is depreciation calculated?

How is depreciation calculated?

• A. Recording the full purchase price as an expense in the first year.
• B. Doubling the rate each year.
• C. Apportioning an asset's original value, less any expected salvage value, over the expected useful life.
• D. Based on revenue generated by the asset.

Answer: (C)

Depreciation is the systematic allocation of an asset’s cost over the period it will be used. You start with the depreciable base, which is the asset’s cost minus any expected salvage (residual) value. That amount is then allocated across the asset’s estimated useful life, typically evenly in the straight-line approach. For example, if an asset costs 50,000, has a salvage value of 5,000, and a useful life of 10 years, annual depreciation would be (50,000 - 5,000) / 10 = 4,500 per year. This matches the idea of apportioning the original value minus salvage over the asset’s life. Expensing the full purchase price in the first year ignores use over time, doubling the rate each year describes a different declining-balance method, and tying depreciation to revenue misstates the expense by linking it to sales rather than asset usage.

Depreciation is the systematic allocation of an asset’s cost over the period it will be used. You start with the depreciable base, which is the asset’s cost minus any expected salvage (residual) value. That amount is then allocated across the asset’s estimated useful life, typically evenly in the straight-line approach. For example, if an asset costs 50,000, has a salvage value of 5,000, and a useful life of 10 years, annual depreciation would be (50,000 - 5,000) / 10 = 4,500 per year. This matches the idea of apportioning the original value minus salvage over the asset’s life. Expensing the full purchase price in the first year ignores use over time, doubling the rate each year describes a different declining-balance method, and tying depreciation to revenue misstates the expense by linking it to sales rather than asset usage.