A contractor purchases computer equipment for $18,000 with a 5-year useful life and no salvage value. Using straight-line depreciation, what is the monthly depreciation expense?
Correct Answer
A) $300
Annual depreciation = $18,000 ÷ 5 years = $3,600 per year. Monthly depreciation = $3,600 ÷ 12 months = $300 per month. With no salvage value, the full cost is depreciated over the useful life.
Why This Is the Correct Answer
Using straight-line depreciation, the annual depreciation is calculated by dividing the cost by useful life: $18,000 ÷ 5 years = $3,600 per year. To find monthly depreciation, divide the annual amount by 12 months: $3,600 ÷ 12 = $300 per month. Since there's no salvage value, the entire $18,000 cost is depreciated evenly over the 60-month useful life period.
Why the Other Options Are Wrong
Option B: $450
This answer of $450 appears to result from incorrectly calculating annual depreciation as $5,400 ($450 × 12), which would mean depreciating $18,000 over 3.33 years instead of the given 5-year useful life. This miscalculation ignores the specified depreciation period.
Option C: $400
This answer of $400 would result from annual depreciation of $4,800 ($400 × 12), meaning the equipment would be fully depreciated in 3.75 years instead of the specified 5-year useful life. This calculation error shortens the depreciation period incorrectly.
Option D: $360
This answer of $360 would result from annual depreciation of $4,320 ($360 × 12), which would depreciate the equipment over approximately 4.17 years instead of the given 5-year useful life. This calculation uses an incorrect time period for depreciation.
Memory Technique
Remember 'CALM' for straight-line depreciation: Cost ÷ Annual life = yearly amount, then ÷ 12 for Monthly. Cost ($18,000) ÷ Annual life (5) = $3,600, ÷ Monthly (12) = $300.
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