A contractor's equipment has an original cost of $120,000, useful life of 8 years, and salvage value of $16,000. Using straight-line depreciation, what is the book value after 3 years?
Correct Answer
C) $81,000
Annual depreciation = ($120,000 - $16,000) / 8 = $13,000. After 3 years, accumulated depreciation = $39,000. Book value = $120,000 - $39,000 = $81,000.
Why This Is the Correct Answer
The straight-line depreciation method spreads the depreciable amount evenly over the asset's useful life. The depreciable amount is $104,000 ($120,000 - $16,000), which divided by 8 years gives $13,000 annual depreciation. After 3 years, total depreciation is $39,000, making the book value $81,000 ($120,000 - $39,000).
Why the Other Options Are Wrong
Option A: $91,000
This answer ($75,000) appears to calculate depreciation incorrectly, possibly by dividing the full original cost by useful life without properly accounting for salvage value in the depreciation calculation.
Option B: $75,000
This answer ($104,000) represents the total depreciable amount (original cost minus salvage value) rather than the book value after 3 years of depreciation.
Option D: $104,000
This answer ($91,000) suggests only $29,000 in accumulated depreciation, which would be incorrect for 3 years at the proper annual depreciation rate of $13,000.
Memory Technique
Remember 'SLiDE': Straight-Line = (Cost - Salvage) Divided by Estimated life, then subtract accumulated depreciation from original cost for book value.
Reference Hint
Look up 'Depreciation Methods' or 'Straight-Line Depreciation' in the accounting or business management section of your contractor reference manual.
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