Which method uses the formula (Cost - Residual Value) / Estimated Useful Life?

Which method uses the formula (Cost - Residual Value) / Estimated Useful Life?

• A. Straight Line method
• B. Diminishing Balance method
• C. Units of Output method
• D. Annuity depreciation method

Answer: (A)

This method spreads the asset’s cost evenly over its expected period of use. It works by first removing the expected salvage value (residual value) from the purchase cost, since that part is not consumed like depreciation, and then dividing the remaining amount by the estimated useful life. The result is the same amount of depreciation each year, which reflects the idea that the asset provides benefits at a steady rate over time. For example, if an asset costs 100,000, has a residual value of 10,000, and an estimated useful life of 5 years, the annual depreciation would be (100,000 − 10,000) / 5 = 18,000. Other methods don’t use this formula because they describe different patterns of expense: diminishing balance applies a fixed rate to the reducing carrying amount, so depreciation tapers off over time; units of output ties depreciation to actual usage rather than time; and the annuity approach isn’t a standard depreciation method for linearly charging an asset’s cost over its life.

This method spreads the asset’s cost evenly over its expected period of use. It works by first removing the expected salvage value (residual value) from the purchase cost, since that part is not consumed like depreciation, and then dividing the remaining amount by the estimated useful life. The result is the same amount of depreciation each year, which reflects the idea that the asset provides benefits at a steady rate over time. For example, if an asset costs 100,000, has a residual value of 10,000, and an estimated useful life of 5 years, the annual depreciation would be (100,000 − 10,000) / 5 = 18,000.

Other methods don’t use this formula because they describe different patterns of expense: diminishing balance applies a fixed rate to the reducing carrying amount, so depreciation tapers off over time; units of output ties depreciation to actual usage rather than time; and the annuity approach isn’t a standard depreciation method for linearly charging an asset’s cost over its life.