A contractor purchases a truck for $42,000 and expects to use it for 6 years with a salvage value of $6,000. Using straight-line depreciation, what is the annual depreciation expense?
Correct Answer
C) $6,000
Straight-line depreciation = (Cost - Salvage Value) ÷ Useful Life = ($42,000 - $6,000) ÷ 6 years = $36,000 ÷ 6 = $6,000 per year.
Why This Is the Correct Answer
The correct answer is A) $6,000 because straight-line depreciation spreads the depreciable cost evenly over the asset's useful life. The depreciable cost is the original cost minus salvage value ($42,000 - $6,000 = $36,000). This amount is then divided by the useful life of 6 years, resulting in $6,000 annual depreciation. This method assumes the asset loses value at a constant rate each year.
Why the Other Options Are Wrong
Option A: $7,000
Option C ($7,000) is incorrect because it divides the full purchase price by the useful life ($42,000 ÷ 6 = $7,000) without subtracting the salvage value first, which violates the straight-line depreciation principle.
Option D: $7,500
Option D ($7,500) is incorrect and doesn't follow any standard depreciation calculation method. It appears to be an arbitrary figure that doesn't result from the proper straight-line depreciation formula.
Memory Technique
Think 'Straight-Line = Straight Subtraction': Always subtract salvage value first, then divide by years. The asset 'loses' value in a straight line from purchase price down to salvage value.
Reference Hint
Look up 'Depreciation Methods' or 'Straight-Line Depreciation' in the accounting/business management chapter of your contractor reference manual
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