A contractor's equipment has an original cost of $120,000, useful life of 8 years, and salvage value of $16,000. Using straight-line depreciation, what is the book value after 3 years?
Correct Answer
A) $81,000
Annual depreciation = ($120,000 - $16,000) / 8 = $13,000. After 3 years, accumulated depreciation = $39,000. Book value = $120,000 - $39,000 = $81,000.
Why This Is the Correct Answer
The straight-line depreciation method spreads the depreciable amount evenly over the asset's useful life. The depreciable amount is $104,000 ($120,000 - $16,000), which divided by 8 years gives $13,000 annual depreciation. After 3 years, total depreciation is $39,000, making the book value $81,000 ($120,000 - $39,000).
Why the Other Options Are Wrong
Option B: $75,000
This answer ($75,000) appears to calculate depreciation incorrectly, possibly by dividing the full original cost by useful life without properly accounting for salvage value in the depreciation calculation.
Option C: $104,000
This answer ($104,000) represents the total depreciable amount (original cost minus salvage value) rather than the book value after 3 years of depreciation.
Option D: $91,000
This answer ($91,000) suggests only $29,000 in accumulated depreciation, which would be incorrect for 3 years at the proper annual depreciation rate of $13,000.
Memory Technique
Remember 'SLiDE': Straight-Line = (Cost - Salvage) Divided by Estimated life, then subtract accumulated depreciation from original cost for book value.
Reference Hint
Look up 'Depreciation Methods' or 'Straight-Line Depreciation' in the accounting or business management section of your contractor reference manual.
More Business & Finance Questions
A contractor's license expires on March 31st. If they submit a renewal application on April 15th, what additional requirement must be met under Florida regulations?
A general contractor purchases equipment worth $45,000 with a useful life of 9 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
In Florida, what is the minimum workers' compensation insurance coverage required for construction companies with employees?
What is the typical recommended coverage amount for general liability insurance for a small to medium-sized general contracting business?
A contractor estimates startup costs of $75,000 for equipment, $25,000 for initial inventory, $15,000 for insurance premiums, and $10,000 for working capital. They can finance 70% of the total. How much cash do they need?