In the straight-line method of depreciation, depreciation is calculated based on the:

• A. Current market value of the asset each year
• B. Cost of the asset minus its estimated residual value, divided by its useful life
• C. Total cash flows generated by the asset
• D. Sum-of-the-years'-digits of the asset's useful life

Answer: (B)

Verified step by step guidance

1. Understand the straight-line method of depreciation: This method allocates the cost of an asset evenly over its useful life. It is based on the assumption that the asset will provide equal benefits each year.
2. Identify the formula for straight-line depreciation: Depreciation Expense = (Cost of the Asset - Residual Value) / Useful Life.
3. Define the components of the formula: The 'Cost of the Asset' is the purchase price or acquisition cost. The 'Residual Value' (also called salvage value) is the estimated value of the asset at the end of its useful life. The 'Useful Life' is the expected period during which the asset will be productive.
4. Apply the formula: Subtract the Residual Value from the Cost of the Asset to determine the depreciable amount. Then divide this amount by the Useful Life to calculate the annual depreciation expense.
5. Ensure consistency: Use the same values for cost, residual value, and useful life throughout the calculation to maintain accuracy and consistency in financial reporting.