A contractor purchases equipment for $120,000 with an estimated useful life of 8 years and no salvage value. Using the straight-line depreciation method, what is the annual depreciation expense?
Correct Answer
B) $15,000
Straight-line depreciation = (Cost - Salvage Value) ÷ Useful Life = ($120,000 - $0) ÷ 8 years = $15,000 per year. This method spreads the cost evenly over the asset's useful life.
Why This Is the Correct Answer
Option B ($15,000) is correct because straight-line depreciation divides the depreciable cost evenly across all years of useful life. With a cost of $120,000, no salvage value, and 8-year useful life, the annual depreciation is $120,000 ÷ 8 = $15,000. This method provides consistent annual expenses for accounting and tax purposes.
Why the Other Options Are Wrong
Option C: $20,000
This appears to use approximately 6.67 years as the divisor ($120,000 ÷ 6.67 ≈ $18,000), which is not the given 8-year useful life.
Option D: $18,000
This would result from dividing by 6 years instead of 8 years ($120,000 ÷ 6 = $20,000), using an incorrect useful life period.
Memory Technique
Remember 'SLD = Straight Line Down' - the cost goes straight down evenly each year. Think of it as slicing a pie into equal pieces where each slice represents one year.
Reference Hint
Look up 'Depreciation Methods' or 'Straight-Line Depreciation' in the accounting/business management section of your contractor reference manual.
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