A general contractor purchases equipment for $85,000 with an expected 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
Using 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 B is correct because straight-line depreciation uses the formula (Cost - Salvage Value) ÷ Useful Life. The depreciable amount is $85,000 - $15,000 = $70,000, which represents the total value that will be depreciated over the asset's useful life. Dividing this $70,000 by 7 years gives us exactly $10,000 per year. This method ensures the asset's book value decreases by the same amount each year until it reaches the salvage value.
Why the Other Options Are Wrong
Option A: $12,143
This answer ($11,667) could result from using 6 years instead of 7 years in the calculation, or from another mathematical error in applying the straight-line depreciation formula.
Option B: $8,571
This answer ($8,571) might result from incorrectly using 8 years instead of 7 years in the denominator, or from another calculation error in the depreciation formula.
Memory Technique
Think 'Straight-line = Straight math': Take the total loss in value (what you paid minus what it's worth at the end) and spread it evenly across all years.
Reference Hint
Look up 'Depreciation Methods' or 'Straight-Line Depreciation' in the accounting/business management chapter of your contractor reference manual
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