8.2 Straight-Line & Units-of-Production Methods

Straight-line: even allocation of depreciable base

Straight-line (SL) is the default book method for many small businesses because it is easy to schedule, easy to explain to an owner, and acceptable under U.S. GAAP when the asset’s service is roughly even over time. AIPB’s Mastering Depreciation treats it as its own workbook section: compute, allocate, journalize, and maintain the schedule.

Annual SL depreciation = (Cost − Salvage) ÷ Useful life in years

Harbor Kitchen Supply’s mixer from section 8.1:

• Cost $47,000
• Salvage $5,000
• Life 6 years
• Depreciable base $42,000
• Full-year expense $42,000 ÷ 6 = $7,000

Monthly books often take $7,000 ÷ 12 = $583.33 (round consistently; this guide keeps cents only when a monthly convention needs them, and dollars when the problem is annual). Partial-year fractions are section 8.4.

Six-year straight-line schedule (in service 1 January Year 1, full years)

Check the last row: accumulated depreciation equals the $42,000 base, not the $47,000 cost. Book value rests on salvage. If someone posts a seventh $7,000, they have depreciated through salvage — a fail on a Prometric item.

Office / selling equipment journal entry (annual):

Dr Depreciation Expense 7,000
Cr Accumulated Depreciation—Equipment 7,000

Factory equipment: debit Manufacturing Overhead $7,000 instead of Depreciation Expense so the cost can attach to production.

Common SL errors

• Dividing cost by life and skipping salvage: $47,000 ÷ 6 = $7,833.33, which overstates expense and drives book value below the $5,000 floor by Year 6.
• Dividing depreciable base by life minus one “because salvage is the last year.”
• Crediting Equipment instead of Accumulated Depreciation, which hides historical cost.

Change in estimate (prospective only)

At the start of Year 3, Harbor’s mixer has book value $33,000 (after two $7,000 years). Management now expects $3,000 salvage and 6 remaining years (the machine will be kept longer). New annual SL =

($33,000 − $3,000) ÷ 6 = $5,000

Years 1–2 stay $7,000 each. No retroactive restatement. Exam items that ask you to “fix” Year 1 after a Year 3 revision are testing whether you know changes in estimate are prospective.

Units-of-production: allocate by actual use

Units-of-production (UOP) (also called units-of-activity) matches expense to output, hours, or miles when wear tracks use better than calendar time. A seasonal press that runs 20,000 units one year and 4,000 the next should not show the same depreciation both years.

Depreciation per unit = (Cost − Salvage) ÷ Total estimated lifetime units
This period’s UOP depreciation = Per-unit rate × Units this period

Cedar & Pine Bakery installs an industrial press:

• Cost $52,000
• Salvage $4,000
• Estimated lifetime output 80,000 units
• Depreciable base $48,000
• Rate $48,000 ÷ 80,000 = $0.60 per unit

Year 1 actual output 12,000 units → 12,000 × $0.60 = $7,200.

Five-year units-of-production schedule

If Year 5 had produced 20,000 units, 20,000 × $0.60 = $12,000 would exceed remaining depreciable base of $13,000 − $4,000 = $9,000. Record only $9,000, not $12,000. UOP never takes more than the unused base. If the press is idle (zero units), UOP depreciation is $0 that period — unlike straight-line, which still runs with the calendar.

If lifetime units are revised, recompute a new per-unit rate from remaining depreciable book value (cost − accum dep − current salvage) divided by remaining estimated units. Apply the new rate going forward.

UOP journal entry uses the same accounts as SL; only the dollar amount changes with output. Factory presses still hit overhead; a delivery van’s UOP-by-miles for a nonmanufacturer hits Depreciation Expense.

UOP errors

• Forgetting salvage in the per-unit rate: $52,000 ÷ 80,000 = $0.65, then 12,000 × $0.65 = $7,800 for Year 1 (too high).
• Stopping after the per-unit rate and calling $0.60 the year’s expense.
• Using this year’s units in the denominator ($48,000 ÷ 12,000) as if the asset would die after one season.

Choosing SL versus UOP on the books

You may use SL on the building and UOP on the press in the same entity. Consistency for each class of asset is the bookkeeping virtue; switching methods for a single asset is a change in accounting estimate effected by a change in principle and is not a casual journal-entry tweak.

Building and maintaining the depreciation schedule

A usable book schedule, whether a spreadsheet or a fixed-asset module, needs at least: asset ID, description, acquisition date, capitalized cost, salvage, life or lifetime units, method, current-year expense, accumulated depreciation, and book value. AIPB’s workbook emphasizes keeping the schedule so the year-end adjusting entry is a lookup, not a reconstruction from memory. When an asset is added mid-year, the schedule’s first-year column is a fraction (section 8.4), not a silent full $7,000.

Traps

• Calling UOP “straight-line per unit” and then still dividing by years
• Taking a full SL year on an asset placed in service in November (unless a half-year book policy says so — and then you must apply that policy, not invent MACRS)
• Letting accumulated depreciation exceed cost minus salvage
• Restating prior-year SL after a life revision
• Posting factory SL to Depreciation Expense when the problem is a manufacturer