Describe straight-line depreciation and its effect on financial statements.

• A. (Cost − Salvage value)/Useful life per period; reduces net income by depreciation expense and reduces the asset’s carrying amount.
• B. Depreciation accelerates depreciation to front-load expenses.
• C. Depreciation increases assets' carrying amount.
• D. Depreciation ignores salvage value in calculations.

Answer: (A)

Straight-line depreciation allocates the asset’s cost evenly over its useful life. It uses the depreciable base, which is cost minus salvage value, and divides that by the number of periods in the useful life to determine the annual depreciation expense. This expense reduces net income on the income statement each period. On the balance sheet, the asset’s carrying amount declines by the same amount each year because accumulated depreciation increases as depreciation expense is recorded. Salvage value is part of the calculation, so you don’t ignore it; it determines the total amount to be allocated over time. For example, if an asset costs 50,000 with a salvage value of 5,000 and a 10-year life, annual depreciation is (50,000 − 5,000) / 10 = 4,500, which lowers net income by 4,500 each year and reduces the asset’s carrying amount by 4,500 annually until it reaches 5,000 at the end.