A contractor purchases equipment for $50,000 with a 10-year useful life and $5,000 salvage value. Using straight-line depreciation, what is the annual depreciation expense?
Correct Answer
D) $4,500
Straight-line depreciation = (Cost - Salvage Value) ÷ Useful Life. ($50,000 - $5,000) ÷ 10 years = $4,500 per year.
Why This Is the Correct Answer
Option D is correct because straight-line depreciation calculates annual expense by subtracting salvage value from original cost, then dividing by useful life. The formula is (Cost - Salvage Value) ÷ Useful Life = ($50,000 - $5,000) ÷ 10 years = $45,000 ÷ 10 = $4,500 per year. This method spreads the depreciable amount evenly over the asset's useful life.
Why the Other Options Are Wrong
Option A: $5,500
Option A incorrectly divides the full purchase price by useful life without subtracting salvage value: $50,000 ÷ 10 = $5,000, then adds an unexplained $500. This violates the fundamental principle that salvage value represents the asset's remaining worth and should not be depreciated.
Option B: $5,000
Option B simply uses the salvage value as the annual depreciation, which is incorrect. The salvage value ($5,000) represents the estimated residual value at the end of useful life, not the annual depreciation expense. This completely ignores the depreciation calculation formula.
Option C: $4,000
Option C appears to use an incorrect calculation, possibly dividing $40,000 by 10 years. This might result from an error in determining the depreciable base or using wrong figures in the calculation, leading to an understated annual depreciation expense.
Memory Technique
Remember 'Cost minus Salvage, then divide by Age' - the depreciable BASE is what loses value over time, not the full cost. Think: 'What actually wears out?' The salvage value stays, so only depreciate the difference.
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