A contractor purchases equipment for $50,000 with an estimated useful life of 10 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
Correct Answer
B) $5,000
Straight-line depreciation = (Cost - Salvage Value) ÷ Useful Life = ($50,000 - $0) ÷ 10 years = $5,000 per year. This method spreads the cost evenly over the asset's useful life.
Why This Is the Correct Answer
Option A is correct because straight-line depreciation divides the depreciable cost evenly across the asset's useful life. With a $50,000 equipment cost, zero salvage value, and 10-year useful life, the annual depreciation is $50,000 ÷ 10 = $5,000. This method provides consistent annual expenses for financial planning and tax purposes. The straight-line method is the most common depreciation approach for construction equipment.
Why the Other Options Are Wrong
Option A: $10,000
This appears to be an arbitrary figure that doesn't follow the straight-line depreciation formula, possibly resulting from incorrectly applying a percentage method or making calculation errors.
Option D: $50,000
This would be the result if you incorrectly used a 5-year useful life ($50,000 ÷ 5 = $10,000) instead of the given 10 years, or if you mistakenly doubled the correct calculation.
Memory Technique
Remember 'Straight-Line = Straight Division' - just divide the net cost (after subtracting salvage value) by the number of years. Think of it as spreading peanut butter evenly on bread - equal amounts each year.
Reference Hint
Look up 'Depreciation Methods' or 'Straight-Line Depreciation' in the accounting/financial management chapter of your contractor reference manual, typically found in the business practices section.
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