Which statement about the basis for depreciation calculation is correct?

Which statement about the basis for depreciation calculation is correct?

• A. Original Cost minus Salvage Value divided by Age of Asset
• B. Original Cost minus Salvage Value divided by Useful Life
• C. Original Cost divided by Age of Asset
• D. Original Cost minus Salvage Value divided by Expected Useful Life

Answer: (D)

This question tests how depreciation basis is determined under the straight-line method. Depreciation uses the depreciable base, which is the original cost minus the salvage value, and then spreads that amount evenly over the asset’s expected useful life. The annual depreciation equals (original cost minus salvage value) divided by the expected useful life. Using the age of the asset in the denominator would not reflect how much of the asset’s economic benefits remain to be depreciated, but rather how long it has already been in use. Omitting salvage value or dividing cost by age would misstate the amount to be allocated over time. Therefore, the correct basis is original cost minus salvage value divided by the expected useful life.

This question tests how depreciation basis is determined under the straight-line method. Depreciation uses the depreciable base, which is the original cost minus the salvage value, and then spreads that amount evenly over the asset’s expected useful life. The annual depreciation equals (original cost minus salvage value) divided by the expected useful life.

Using the age of the asset in the denominator would not reflect how much of the asset’s economic benefits remain to be depreciated, but rather how long it has already been in use. Omitting salvage value or dividing cost by age would misstate the amount to be allocated over time. Therefore, the correct basis is original cost minus salvage value divided by the expected useful life.