A contractor purchases equipment for $85,000 with an expected useful life of 7 years and a salvage value of $8,500. Using straight-line depreciation, what is the annual depreciation expense?
Correct Answer
B) $10,929
Straight-line depreciation = (Cost - Salvage Value) / Useful Life = ($85,000 - $8,500) / 7 years = $76,500 / 7 = $10,929 per year.
Why This Is the Correct Answer
Option A is correct because straight-line depreciation calculates equal annual depreciation over the asset's useful life. The formula subtracts salvage value from the original cost to find the total depreciable amount, then divides by useful life years. This method spreads the cost evenly across all years of use, making it the most common depreciation method for construction equipment.
Why the Other Options Are Wrong
Option C: $9,857
This answer ($11,500) is close but incorrect, suggesting a calculation error such as rounding mistakes or using slightly different values in the straight-line depreciation formula.
Option D: $11,500
This answer ($12,143) appears to divide the full purchase price by useful life without subtracting salvage value, or uses an incorrect calculation method that doesn't follow straight-line depreciation principles.
Memory Technique
Remember 'CSV' - Cost minus Salvage, then divide by Years. Think 'Comma Separated Values' but for depreciation: Cost, Salvage, Years.
Reference Hint
Look up 'Depreciation Methods' or 'Straight-Line Depreciation' in accounting or business management chapters of contractor reference materials
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