Which statement is true about the straight-line method of depreciation?

• A. It allocates an equal amount of depreciation expense each year over the asset's useful life.
• B. It results in higher depreciation expense in the early years and lower expense in later years.
• C. It bases depreciation expense on the actual usage or output of the asset.
• D. It does not consider the asset's residual (salvage) value.

Answer: (A)

Verified step by step guidance

1. Understand the concept of depreciation: Depreciation is the allocation of the cost of a tangible asset over its useful life. It reflects the wear and tear or obsolescence of the asset over time.
2. Learn about the straight-line method: The straight-line method of depreciation allocates an equal amount of depreciation expense each year over the asset's useful life. This method is simple and widely used in accounting.
3. Identify the formula for straight-line depreciation: The formula is: \( \text{Depreciation Expense} = \frac{\text{Cost of Asset} - \text{Residual Value}}{\text{Useful Life}} \). This ensures the expense is evenly distributed over the years.
4. Compare the straight-line method to other methods: Unlike methods such as the double-declining balance method, which result in higher depreciation expense in the early years, the straight-line method maintains consistency in annual depreciation expense.
5. Clarify the role of residual value: The straight-line method considers the asset's residual (salvage) value, which is subtracted from the asset's cost before dividing by its useful life to calculate annual depreciation.