Calculating straight-line depreciation
For this example, let's assume that a farmer purchases a tractor for $25,000 that he expects will last him 10 years. At the end of this 10-year period, the farmer reckons he can sell the tractor on the used market for $8,000.
Using the straight-line method, we know that we will be creating a constant depreciation expense every year. We also know that the book value of the tractor should equal $8,000 after 10 years (this is its residual, or salvage, value).
To calculate how much should be expensed as depreciation each year, we first subtract the $8,000 residual value from the original $25,000 purchase price. That result, $17,000, is then divided by the number of years in the tractor's useful life, in this case 10 years, to give us our annual depreciation expense for the tractor. $17,000 divided by 10 years is $1,700 per year.