A piece of equipment costs $85,000 with a 5-year useful life and $5,000 salvage value. Using straight-line depreciation, what is the annual depreciation expense?
Correct Answer
B) $16,000
Straight-line depreciation = (Cost - Salvage Value) ÷ Useful Life = ($85,000 - $5,000) ÷ 5 = $16,000 per year.
Why This Is the Correct Answer
Option B is correct because straight-line depreciation calculates the annual depreciation by taking the depreciable amount (cost minus salvage value) and dividing it by the useful life. The equipment costs $85,000 with a $5,000 salvage value, giving us $80,000 to depreciate over 5 years. This equals exactly $16,000 per year in depreciation expense.
Why the Other Options Are Wrong
Option A: $17,000
Option A calculates $17,000, which would result from dividing the full cost ($85,000) by 5 years without subtracting the salvage value, incorrectly ignoring the equipment's residual worth.
Option C: $15,000
Option C shows $15,000, which appears to be an arbitrary calculation that doesn't follow the straight-line depreciation formula and understates the actual annual depreciation.
Option D: $20,000
Option D shows $20,000, which significantly overstates the depreciation and doesn't align with any standard depreciation calculation method for these given values.
Memory Technique
Remember 'CSV' - Cost minus Salvage Value, then divide by years. Think 'Can't Salvage Value' - you can't depreciate what you'll get back!
Reference Hint
Look up 'Depreciation Methods' or 'Straight-Line Depreciation' in accounting or business management chapters of your contractor reference manual.
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