A contractor purchases equipment for $50,000 with a 5-year useful life and $5,000 salvage value. Using straight-line depreciation, what is the annual depreciation expense?
Correct Answer
A) $9,000
Straight-line depreciation = (Cost - Salvage Value) ÷ Useful Life. ($50,000 - $5,000) ÷ 5 years = $45,000 ÷ 5 = $9,000 per year.
Why This Is the Correct Answer
Option B ($9,000) is correct because straight-line depreciation calculates the annual expense by dividing the depreciable amount by the useful life. The depreciable amount is the cost minus salvage value ($50,000 - $5,000 = $45,000). This $45,000 is then divided by 5 years to get $9,000 per year. This method spreads the depreciation evenly over the asset's useful life.
Why the Other Options Are Wrong
Option C: $8,000
Option C ($8,000) appears to use an incorrect calculation, possibly confusing depreciation methods or making arithmetic errors. The correct straight-line calculation yields $9,000, not $8,000, when properly applying the standard formula.
Option D: $10,000
Option A ($10,000) incorrectly divides the full purchase price by useful life without subtracting salvage value. This calculation ($50,000 ÷ 5 = $10,000) ignores that the asset retains $5,000 value at end of life, overstating annual depreciation expense.
Memory Technique
Remember 'CSV' - Cost minus Salvage Value, then divide by years. Think 'Can't Salvage Value' - you can't depreciate what you'll get back!
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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