A contractor purchases equipment for $85,000 with an expected useful life of 7 years and a salvage value of $8,000. Using straight-line depreciation, what is the annual depreciation expense?
Correct Answer
B) $11,000
Straight-line depreciation = (Cost - Salvage Value) / Useful Life = ($85,000 - $8,000) / 7 years = $77,000 / 7 = $11,000 per year. This method spreads the depreciable cost evenly over the asset's useful life.
Why This Is the Correct Answer
Option B ($11,000) is correct because straight-line depreciation calculates annual expense by dividing the depreciable amount by useful life. The depreciable amount is cost minus salvage value: $85,000 - $8,000 = $77,000. Dividing by 7 years gives $11,000 per year. This method allocates the asset's cost evenly over its productive life, providing consistent annual depreciation expenses for financial planning and tax purposes.
Why the Other Options Are Wrong
Option A: $12,143
Option A ($12,143) incorrectly divides the full purchase price ($85,000) by the useful life (7 years), failing to subtract the salvage value. This overstates annual depreciation by including the asset's residual value that won't be depreciated.
Option C: $10,286
Option C ($10,286) appears to use an incorrect calculation method, possibly dividing by 7.5 years instead of 7, or using a different depreciation formula. The straight-line method requires exactly 7 years as specified in the problem.
Option D: $77,000
Option D ($77,000) represents the total depreciable amount over the asset's entire life, not the annual depreciation expense. This is the numerator in the calculation before dividing by useful life years.
Memory Technique
Remember 'CaSh SaLvage': Cost minus Salvage, then Slash (divide) by Life. The salvage value is what you 'salvage' at the end, so subtract it first.
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