A general contractor purchases equipment for $120,000 with an estimated useful life of 8 years and a salvage value of $8,000. Using straight-line depreciation, what is the annual depreciation expense?
Correct Answer
C) $14,000
Straight-line depreciation = (Cost - Salvage Value) ÷ Useful Life. ($120,000 - $8,000) ÷ 8 years = $112,000 ÷ 8 = $14,000 per year.
Why This Is the Correct Answer
Option A ($14,000) is correct because it properly applies the straight-line depreciation formula. The calculation takes the depreciable amount ($120,000 - $8,000 = $112,000) and divides it evenly over the 8-year useful life. This method assumes the equipment loses value at a constant rate each year, which is the fundamental principle of straight-line depreciation.
Why the Other Options Are Wrong
Option B: $16,000
Option C ($12,000) is incorrect and likely results from a calculation error. This amount is too low and doesn't follow from the proper straight-line depreciation formula using the given values.
Option D: $15,000
Option D ($16,000) is incorrect and significantly overstates the annual depreciation. This amount exceeds what would be calculated even if the salvage value were incorrectly omitted from the formula.
Memory Technique
Remember 'SLiDE': Straight-Line = (Cost - Salvage) ÷ Life. The equipment 'slides' down in value evenly each year until it reaches its salvage 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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