Question

In the straight-line depreciation method, depreciation is

• A. increasing every year
• B. decreasing every year
• C. constant every year
• D. zero after first year

Hint:

In Straight-Line Depreciation, the depreciation amount is constant, and the book value decreases linearly with time.
In Decreasing-Balance or Declining-Balance methods, the annual depreciation decreases every year while the rate remains constant.

Answer 1

The Correct Option is C

Step 1: Understanding the Question:
This question asks about the variation of annual depreciation over time when calculated using the straight-line depreciation method.
Depreciation is the systematic reduction in the recorded value of a physical asset over its useful service life due to wear and tear, age, or obsolescence.

Step 2: Key Formula or Approach:
The straight-line depreciation method is the simplest and most commonly used technique in process plant economics.
The annual depreciation value (\(D\)) is calculated using the formula:
\[ D = \frac{V_0 - V_s}{n} \] where:
\(V_0\) is the initial asset cost (or original value).
\(V_s\) is the salvage or scrap value at the end of the asset's service life.
\(n\) is the service life of the asset in years.

Step 3: Detailed Explanation:
Let us examine the variables in the straight-line formula:
- The original value \(V_0\) is a fixed historical cost.
- The salvage value \(V_s\) is an estimated constant value determined at the start of the asset's use.
- The service life \(n\) is a fixed number of years.
Since all parameters on the right side of the equation are constants, the annual depreciation \(D\) remains identical for every year of the asset's life.
For example, if an equipment costs \(\$100,000\) (\(V_0\)) with a salvage value of \(\$10,000\) (\(V_s\)) and a service life of \(10\) years (\(n\)), the depreciation is:
\[ D = \frac{100,000 - 10,000}{10} = \frac{90,000}{10} = 9,000 \text{ per year} \] In this case, the depreciation is exactly \(\$9,000\) in Year 1, Year 2, and every subsequent year up to Year 10.
The annual book value of the asset decreases linearly over time, which gives the method its name.
Thus, the depreciation is constant every year.

Step 4: Final Answer
Therefore, the straight-line depreciation is constant every year, which corresponds to option (C).