To illustrate straight line depreciation let's assume that a company purchases equipment at a cost of $430,000 and it is expected to be used in the business for 10 years. At the end of the 10 years, the company expects to receive a salvage value of $30,000. Under the straight line method each full accounting year will be allocated $40,000 of depreciation, which is one-tenth (1/10) or 10% of the $400,000 that needs to be depreciated over the useful life of the equipment. If the asset is purchased in the middle of the accounting year there will be $20,000 of depreciation in the first and the eleventh accounting year and $40,000 in each of the years 2 through 10.
In the U.S. a company may use the straight line method for its financial statements while at the same time be using the Internal Revenue Service's faster depreciation on its federal income tax return.
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