A general contractor purchases equipment for $85,000 with an estimated useful life of 7 years and a salvage value of $8,000. Using straight-line depreciation, what is the annual depreciation expense?
Correct Answer
A) $11,000
Straight-line depreciation is calculated as (Cost - Salvage Value) ÷ Useful Life. ($85,000 - $8,000) ÷ 7 years = $77,000 ÷ 7 = $11,000 per year.
Why This Is the Correct Answer
Option A is correct because straight-line depreciation uses the simple formula of (Cost - Salvage Value) ÷ Useful Life. The depreciable amount is $85,000 - $8,000 = $77,000, which when divided by 7 years equals exactly $11,000 per year. This method spreads the depreciation evenly across all years of the asset's useful life.
Why the Other Options Are Wrong
Option B: $10,286
This answer ($10,286) is too low and appears to result from an incorrect calculation, possibly using wrong values or applying a different depreciation method formula.
Option C: $11,571
This answer ($11,571) seems to result from an error in the calculation, possibly from incorrectly handling the salvage value or making an arithmetic mistake in the division.
Option D: $12,143
This answer ($12,143) appears to be calculated by dividing the full purchase price ($85,000) by the useful life (7 years), incorrectly ignoring the salvage value that must be subtracted first.
Memory Technique
Remember 'CSS' - Cost minus Salvage, then Split by years. The salvage value is what you 'salvage' at the end, so don't depreciate it!
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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