How is depreciation expense calculated?

How is depreciation expense calculated?

• A. Purchase price - salvage value
• B. Salvage value - Purchase price
• C. Purchase price + salvage value
• D. Purchase price * salvage value

Answer: (A)

Depreciation expense is the allocation of an asset’s cost over its useful life. The amount to allocate is the asset’s cost minus its salvage (residual) value, which gives the depreciable base. Depreciation expense per period, using straight-line method, is this depreciable base divided by the asset’s useful life. So, cost minus salvage value is the correct basis. The other formulations aren’t how depreciation works: adding salvage value to cost or multiplying them ignores the idea of spreading only the loss of value over time, and reversing the order or subtracting in the wrong direction can produce nonsensical results like a negative base.

Depreciation expense is the allocation of an asset’s cost over its useful life. The amount to allocate is the asset’s cost minus its salvage (residual) value, which gives the depreciable base. Depreciation expense per period, using straight-line method, is this depreciable base divided by the asset’s useful life.

So, cost minus salvage value is the correct basis. The other formulations aren’t how depreciation works: adding salvage value to cost or multiplying them ignores the idea of spreading only the loss of value over time, and reversing the order or subtracting in the wrong direction can produce nonsensical results like a negative base.