A contractor purchases equipment for $50,000 with an estimated useful life of 10 years and a salvage value of $5,000. Using straight-line depreciation, what is the annual depreciation expense?
Correct Answer
A) $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 A ($4,500) is correct because it properly applies the straight-line depreciation formula. The calculation takes the depreciable amount ($50,000 cost minus $5,000 salvage value = $45,000) and divides it by the useful life (10 years). This gives us $45,000 ÷ 10 = $4,500 annual depreciation expense. This method spreads the cost evenly over the asset's useful life.
Why the Other Options Are Wrong
Option B: $5,000
This option ($5,000) incorrectly divides the full purchase price by the useful life ($50,000 ÷ 10 = $5,000), failing to subtract the salvage value. The salvage value represents the estimated worth at the end of useful life and must be excluded from the depreciable amount.
Option C: $4,000
This option ($4,000) appears to use an incorrect depreciable amount, possibly miscalculating the cost minus salvage value or using the wrong useful life period. The correct depreciable amount should be $45,000, not $40,000.
Option D: $5,500
This option ($5,500) exceeds even the incorrect calculation that ignores salvage value, suggesting a fundamental error in applying the depreciation formula or possibly adding rather than subtracting the salvage value.
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 the accounting or business management section of your reference materials
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