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
B) $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 A: $4,000
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: $5,000
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
More Business & Finance Questions
A general contractor purchases equipment worth $45,000 with a useful life of 9 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
What is the typical recommended coverage amount for general liability insurance for a small to medium-sized general contracting business?
A contractor estimates startup costs of $75,000 for equipment, $25,000 for initial inventory, $15,000 for insurance premiums, and $10,000 for working capital. They can finance 70% of the total. How much cash do they need?
When establishing professional relationships with architects and engineers, what is the most important factor for a general contractor to consider?
A partnership agreement for a construction company should address all of the following EXCEPT:
A contractor purchases a truck for $60,000. After 5 years, it has accumulated depreciation of $35,000. What is the truck's book value?
A contractor's business plan projects first-year revenue of $500,000 with a 15% net profit margin. If actual revenue is $450,000 with the same profit margin, what is the variance in net profit?
Using the Modified Accelerated Cost Recovery System (MACRS), construction equipment is typically depreciated over how many years?
A contractor is comparing financing options for equipment purchase. Option A: $80,000 cash purchase. Option B: $20,000 down, $65,000 financed at 6% for 4 years. What is the total cost of Option B?
A contractor purchases equipment using a capital lease with a present value of $120,000. How should this be recorded on the balance sheet?
People Also Study
Related Study Resources
Previous Question
A target client has awarded you two small projects. What is the most effective strategy to build this relationship for larger future opportunities?
Next Question
A 55-year-old experienced carpenter is laid off during a company downsizing, while younger employees with less experience are retained. Under the Age Discrimination in Employment Act (ADEA), this could constitute age discrimination if the company has: