An allocation schedule spreads $500,000 over 50 years in equal annual charges, with no salvage value. What is the annual charge?
Correct Answer
C) $10,000
500000÷50 = 10000. Common errors: reporting the total cost instead of the annual charge gives $500,000; reporting a monthly charge instead of the annual charge gives $833; counting 51 years (both end points) instead of 50 gives $9,804.
Why This Is the Correct Answer
Option C is correct because $500,000 / 50 years = $10,000 per year. With zero salvage and equal charges, each of the 50 years carries the same amount. The question asks for the annual figure, which is $10,000.
Why the Other Options Are Wrong
Option A: $833
Option A is wrong because $833 is a monthly charge, $500,000 / 50 / 12 = $833, not the annual charge. The annual charge is $500,000 / 50 = $10,000.
Option B: $9,804
Option B is wrong because $9,804 comes from counting 51 years (both end points) instead of 50: $500,000 / 51 = $9,804. The correct division is $500,000 / 50 = $10,000.
Option D: $500,000
Option D is wrong because $500,000 is the total amount being allocated, not the yearly charge. Spread over 50 years it is $500,000 / 50 = $10,000 per year.
Divide by years, check units
Total divided by years gives the yearly charge. Divide again by 12 only if the question asks for monthly.
How to use: Use this when a question asks for a straight-line annual charge with no salvage.
Exam Tip
Read whether the question wants an annual, monthly or total figure. Each one is often listed as a choice.
Common Mistakes to Avoid
- -Dividing by 12 when the question asks for an annual charge
- -Adding an extra year to the stated life
- -Reporting the total cost as the annual charge
Concept Deep Dive
Analysis
This question tests an equal annual allocation with no salvage value. The annual charge is the total divided by the life: $500,000 / 50 = $10,000. It is a bookkeeping allocation, not a measure of market loss.
Background Knowledge
Accounting depreciation uses a preselected life set when the asset is new to fix a periodic charge. Appraisal depreciation measures loss in market value as of the effective date, which may differ from any book schedule.
Real-World Application
An owner's tax records show a $500,000 improvement written off evenly over 50 years. The appraiser recognizes the $10,000 annual charge as an accounting entry and does not use it as the market depreciation estimate.
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A cost of $500,000 is allocated in equal annual charges over 40 years with no salvage value. What is the annual charge?
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An undamaged but functionally inadequate system causes a supported $60,000 loss. Replacement costs $85,000 and restores only $60,000, with no other benefits. What loss classification and deduction fit?