A piece of construction equipment costs $120,000 with an estimated useful life of 8 years and a salvage value of $8,000. Using the straight-line depreciation method, what is the annual depreciation expense?
Correct Answer
D) $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 B ($14,000) is correct because it properly applies the straight-line depreciation formula. The formula subtracts the salvage value from the initial cost to find the total depreciable amount, then divides by the useful life. This method spreads the depreciation evenly over the equipment's useful life, which is the defining characteristic of straight-line depreciation. The calculation yields exactly $14,000 per year in depreciation expense.
Why the Other Options Are Wrong
Option B: $15,000
Option C ($15,000) is incorrect because it appears to ignore the salvage value entirely, calculating $120,000 ÷ 8 = $15,000, which violates the straight-line depreciation formula.
Option C: $16,000
Option A ($12,000) is incorrect because it appears to divide the total cost by 10 years instead of 8 years, or fails to properly account for the salvage value in the calculation.
Memory Technique
Remember 'CSV' - Cost minus Salvage, then divide by Years. Think 'Cost Saves Value' to remember you subtract salvage value from cost first.
Reference Hint
Look up 'Depreciation Methods' or 'Straight-Line Depreciation' in the accounting or business management section of your contractor reference manual.
More Business & Finance Questions
A general contractor purchases equipment worth $45,000 with a useful life of 9 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
What is the typical recommended coverage amount for general liability insurance for a small to medium-sized general contracting business?
A contractor estimates startup costs of $75,000 for equipment, $25,000 for initial inventory, $15,000 for insurance premiums, and $10,000 for working capital. They can finance 70% of the total. How much cash do they need?
When establishing professional relationships with architects and engineers, what is the most important factor for a general contractor to consider?
A partnership agreement for a construction company should address all of the following EXCEPT:
A contractor purchases a truck for $60,000. After 5 years, it has accumulated depreciation of $35,000. What is the truck's book value?
A contractor's business plan projects first-year revenue of $500,000 with a 15% net profit margin. If actual revenue is $450,000 with the same profit margin, what is the variance in net profit?
Using the Modified Accelerated Cost Recovery System (MACRS), construction equipment is typically depreciated over how many years?
A contractor is comparing financing options for equipment purchase. Option A: $80,000 cash purchase. Option B: $20,000 down, $65,000 financed at 6% for 4 years. What is the total cost of Option B?
A contractor purchases equipment using a capital lease with a present value of $120,000. How should this be recorded on the balance sheet?