A contractor purchases equipment for $120,000 with an estimated useful life of 8 years and a salvage value of $8,000. Using the straight-line depreciation method, what is the annual depreciation expense?
Correct Answer
A) $14,000
Straight-line depreciation = (Cost - Salvage Value) ÷ Useful Life. ($120,000 - $8,000) ÷ 8 years = $112,000 ÷ 8 = $14,000 per year.
Why This Is the Correct Answer
Option A ($14,000) is correct because it properly applies the straight-line depreciation formula. The calculation takes the depreciable amount ($120,000 - $8,000 = $112,000) and divides it evenly over the useful life of 8 years. This method assumes the equipment loses value at a constant rate each year, which is the fundamental principle of straight-line depreciation.
Why the Other Options Are Wrong
Option B: $15,000
This answer ($15,000) would result from incorrectly calculating $120,000 ÷ 8 = $15,000, which fails to subtract the salvage value from the initial cost before dividing by useful life.
Option C: $16,000
This answer ($16,000) appears to be a calculation error, possibly from rounding mistakes or using incorrect values in the depreciation formula.
Option D: $17,000
This answer ($17,000) is too high and likely results from a fundamental error in applying the straight-line depreciation formula or using wrong values in the calculation.
Memory Technique
Remember 'CSV-UL': Cost minus Salvage Value, divided by Useful Life - this acronym helps you recall the correct order of operations for straight-line depreciation
Reference Hint
Look up 'Depreciation Methods' or 'Straight-Line Depreciation' in accounting or business management chapters of your contractor reference manual
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