A business plan shows equipment purchases of $120,000 to be depreciated over 7 years using straight-line method with no salvage value. What is the monthly depreciation expense?
Correct Answer
B) $1,429
Annual depreciation = $120,000 ÷ 7 years = $17,143. Monthly depreciation = $17,143 ÷ 12 months = $1,429. This represents the monthly expense for financial planning purposes.
Why This Is the Correct Answer
Option B is correct because straight-line depreciation divides the total cost evenly over the useful life. With $120,000 equipment depreciated over 7 years with no salvage value, the annual depreciation is $120,000 ÷ 7 = $17,142.86. Converting to monthly: $17,142.86 ÷ 12 = $1,428.57, which rounds to $1,429. This method provides consistent monthly expense recognition for financial planning.
Why the Other Options Are Wrong
Option A: $2,000
This amount ($1,667) would result from depreciating over 6 years instead of 7 years ($120,000 ÷ 6 ÷ 12 = $1,667)
Option C: $1,667
This amount ($2,000) would result from depreciating over 5 years instead of 7 years ($120,000 ÷ 5 ÷ 12 = $2,000)
Option D: $1,286
This amount ($1,286) is too low and doesn't result from the correct calculation of $120,000 ÷ 7 years ÷ 12 months
Memory Technique
Remember 'SLD-12': Straight Line Depreciation = (Cost ÷ Years) ÷ 12 for monthly amount
Reference Hint
Business and Finance for Contractors - Chapter on Depreciation Methods and Financial Planning
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