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
B) $14,000
Straight-line depreciation = (Cost - Salvage Value) ÷ Useful Life = ($120,000 - $8,000) ÷ 8 years = $14,000 per year.
Why This Is the Correct Answer
The straight-line depreciation method calculates annual depreciation by taking the depreciable amount (original cost minus salvage value) and dividing it by the useful life in years. This method assumes equal depreciation each year over the asset's useful life. The calculation is ($120,000 - $8,000) ÷ 8 years = $112,000 ÷ 8 = $14,000 per year. This represents the amount the equipment loses in value each year for accounting and tax purposes.
Why the Other Options Are Wrong
Option A: $15,000
This answer of $16,000 would result from an incorrect calculation, possibly adding the salvage value instead of subtracting it, or using an incorrect useful life period.
Option C: $16,000
This answer of $12,000 appears to be an arbitrary calculation that doesn't follow the straight-line depreciation formula and would result in under-depreciating the asset.
Memory Technique
Remember 'CSL' - Cost minus Salvage, divided by Life. Think 'Can't Salvage Life' to remember the order of the formula.
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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