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## Bed Linens Company Purchased Machinery – Accounting For Depreciation Under the Straight-Line Method

Depreciation is defined as the portion of the cost of a fixed asset that is paid for over a year or period. Except for land, all property and equipment are subject to depreciation. Depreciation is the decrease in an asset’s usefulness through use.

The straight-line method is one method of calculating depreciation that results in an even distribution of payments over the life of the asset. The formula is: Depreciation = cost – scrap value / estimated useful life.

The price is the price paid for the asset. Salvage value or salvage value is the estimated amount that can be assigned to an asset or that can be obtained from the sale of the asset after its estimated life. The useful life is the estimated service life of the asset.

Let’s say the Bed Linens Company purchased machinery to make its bed linens for $10,000. Its accountant and management estimated that the machine tool is expected to be a *to save* value or residual value of $1000 at the end of its five-year life.

In this case, the total amount of depreciation to be taken from the books of Bed Linens Company during the useful life of the asset is only $9,000 or $1,800 for each year of useful life.

When the salvage value is estimated and subtracted from the value of the fixed asset, the result is called the net estimated cost. Thus if a car purchased for $40,000 is expected to last six years, and has a salvage value of $4,000 at the end of its life, $40,000 is called the cost or capital cost and $36,000 is called the estimated cost.

Charging an equal fraction of the asset’s value each year is called the straight-line method of depreciation.

Using the straight-line method, the percentage of the initial cost charged each year, called the discount rate, is found by dividing 1 by the number of years. For example, if the asset is to be written off over five years, the rate of depreciation is 20%.

Under the straight-line method the amount of depreciation expense in a given year is determined by multiplying the estimated net asset value by the rate of depreciation. So if the estimated cost is $9000, and the depreciation rate is 10%, the annual amount of depreciation expense will be $900. Recorded by deducting depreciation expense.. $900 and credit to accumulated depreciation-machine tool.. $900.

Factors related to asset depreciation are:

(1) initial value;

(2) estimated salvage value; and

(3) useful life.

Under the straight-line method, equal amounts of depreciation expense are taken each year. The basic idea of this method is that the readiness of a fixed asset to provide service is the same from year to year during its useful life.

The asset’s date must be considered when determining the depreciation expense. If the asset was acquired on July 1, 2009, the depreciation would be half-yearly, that is, if the business accounting period ends on December 31.

Depreciation expense will be shown among operating expenses on the Income Statement, while increased depreciation will be shown on the Balance Sheet as a deduction from inventory.

There are other methods of allocating depreciation besides the straight-line method. One of these methods takes into account the fact that many assets provide more service in their earlier years than in their later years, due to reduced mechanical efficiency, increased maintenance costs, and increased obsolescence.

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