A contractor purchases equipment for $50,000 with an estimated useful life of 10 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
Correct Answer
A) $5,000
Straight-line depreciation = (Cost - Salvage Value) ÷ Useful Life = ($50,000 - $0) ÷ 10 years = $5,000 per year. This method spreads the cost evenly over the asset's useful life.
Why This Is the Correct Answer
Option A is correct because straight-line depreciation divides the depreciable cost evenly across the asset's useful life. With a $50,000 equipment cost, zero salvage value, and 10-year useful life, the annual depreciation is $50,000 ÷ 10 = $5,000. This method provides consistent annual expenses for financial planning and tax purposes. The straight-line method is the most common depreciation approach for construction equipment.
Why the Other Options Are Wrong
Option B: $10,000
This would be the result if you incorrectly used a 5-year useful life ($50,000 ÷ 5 = $10,000) instead of the given 10 years, or if you mistakenly doubled the correct calculation.
Option C: $4,500
This appears to be an arbitrary figure that doesn't follow the straight-line depreciation formula, possibly resulting from incorrectly applying a percentage method or making calculation errors.
Option D: $50,000
This represents the total cost of the equipment, not the annual depreciation expense. This would be the answer if someone confused the question and provided the initial purchase price instead of calculating the yearly depreciation.
Memory Technique
Remember 'Straight-Line = Straight Division' - just divide the net cost (after subtracting salvage value) by the number of years. Think of it as spreading peanut butter evenly on bread - equal amounts each year.
Reference Hint
Look up 'Depreciation Methods' or 'Straight-Line Depreciation' in the accounting/financial management chapter of your contractor reference manual, typically found in the business practices section.
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