Straight line depreciation method spreads costs evenly throughout the useful life of a fixed asset.
This depreciation method is appropriate where economic benefits from an asset are expected to be realized evenly over its useful life. Straight line method is also convenient to use where no reliable estimate can be made regarding the pattern of economic benefits expected to be derived over an asset's useful life.
The formula for straight line depreciation is:
Depreciation per year = (Cost − Residual Value) ÷ Useful Life
In the case presented, the formula yields an annual depreciation of $4,000
At the end of year 1, the value of the car will be $21,000
At the end of year 2, the value of the car will be $17,000
At the end of year 3, the value of the car will be $13,000
But, at the end of year 3, the car was sold for $11,000, resulting in a loss (sale price less book value) of $2,000
