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CA Foundation · Accounting · Depreciation and Amortisation

Which of the following is the correct formula for annual depreciation under the straight-line method?

Annual straight-line depreciation equals cost minus residual value, divided by estimated useful life. The depreciable amount is the cost less what the asset is expected to fetch at the end, and it is spread equally over each year of the asset's life, giving a constant yearly charge.

  1. A(Cost of asset − Residual value) ÷ Estimated useful lifeCorrect
  2. B(Cost of asset + Residual value) ÷ Estimated useful life
  3. CBook value at start of year × Fixed percentage
  4. DCost of asset ÷ Estimated residual value

Explanation

Straight-line depreciation spreads the depreciable amount, which is cost less residual value, equally over the useful life. Adding residual value would overstate the charge. Applying a percentage to opening book value describes the written down value method.

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