A contractor purchases equipment for $45,000 with a useful life of 5 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
Correct Answer
B) $9,000
Straight-line depreciation = (Cost - Salvage Value) / Useful Life. $45,000 ÷ 5 years = $9,000 annual depreciation expense.
Why This Is the Correct Answer
Option B is correct because straight-line depreciation distributes the cost of an asset evenly over its useful life. The formula is (Cost - Salvage Value) ÷ Useful Life. With a $45,000 cost, $0 salvage value, and 5-year useful life, the calculation is $45,000 ÷ 5 = $9,000 per year. This method provides consistent annual depreciation expenses for financial planning and tax purposes.
Why the Other Options Are Wrong
Option A: $7,500
$10,500 appears to be an arbitrary figure that doesn't result from the proper straight-line depreciation calculation using the given values.
Option D: $15,000
$15,000 would result from incorrectly dividing $45,000 by 3 years instead of 5 years, significantly overstating the annual depreciation expense.
Memory Technique
Remember 'SLiDE' - Straight Line Depreciation Equals (Cost minus Salvage) Divided by Estimated life. The asset 'slides' down in value equally each year.
Reference Hint
Look up depreciation methods in the accounting or business management section of your reference materials, typically found under 'Asset Management' or 'Financial Accounting' chapters.
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