A general contractor purchases equipment for $45,000 with a useful life of 5 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
Correct Answer
B) $9,000
Using straight-line depreciation, the annual expense is calculated as (Cost - Salvage Value) ÷ Useful Life = ($45,000 - $0) ÷ 5 years = $9,000 per year. This method spreads the cost evenly over the asset's useful life.
Why This Is the Correct Answer
Option B is correct because straight-line depreciation divides the depreciable cost evenly across the asset's useful life. With a $45,000 equipment cost, zero salvage value, and 5-year useful life, the calculation is straightforward: $45,000 ÷ 5 = $9,000 per year. This method assumes the asset loses value at a constant rate each year, making it the simplest and most commonly used depreciation method for construction equipment.
Why the Other Options Are Wrong
Option A: $10,500
This answer of $7,500 would result from incorrectly dividing $45,000 by 6 years instead of 5 years, or possibly confusing this with a different depreciation calculation method.
Option C: $11,250
This answer of $11,250 would result from dividing $45,000 by 4 years instead of 5 years, indicating a misreading of the useful life period.
Memory Technique
Remember 'Straight-Line = Straight Division' - just divide the cost by the years when there's no salvage value. Think of it as the asset losing equal value each year in a straight line down to zero.
Reference Hint
Look up 'Depreciation Methods' or 'Straight-Line Depreciation' in the accounting/financial management chapter of your contractor reference manual.
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