A general contractor purchases equipment for $85,000 with an estimated useful life of 7 years and a salvage value of $15,000. Using straight-line depreciation, what is the annual depreciation expense?
Correct Answer
C) $10,000
Straight-line depreciation = (Cost - Salvage Value) ÷ Useful Life = ($85,000 - $15,000) ÷ 7 years = $70,000 ÷ 7 = $10,000 per year. This method spreads the depreciable cost evenly over the asset's useful life.
Why This Is the Correct Answer
Option A is correct because straight-line depreciation calculates the annual expense by dividing the depreciable amount by the useful life. The depreciable amount is the cost minus salvage value ($85,000 - $15,000 = $70,000). Dividing this by 7 years gives exactly $10,000 per year. This method ensures the asset's cost is allocated evenly across its productive life.
Why the Other Options Are Wrong
Option A: $12,143
This appears to be an error in calculation, possibly from incorrect division or using wrong values in the formula.
Option B: $15,000
This is simply the salvage value amount, not a depreciation calculation. The salvage value represents what the equipment is worth at the end of its useful life, not the annual depreciation expense.
Memory Technique
Remember 'SLiDE': Straight-Line = (Cost - Salvage) ÷ Life. The 'i' reminds you to subtract salvage value first, then Divide by useful life.
Reference Hint
Look up 'Depreciation Methods' or 'Straight-Line Depreciation' in the accounting or business management section of your reference materials.
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