Equipment purchased for $95,000 has a useful life of 8 years and an estimated salvage value of $15,000. Using straight-line depreciation, what is the book value after 3 years?
Correct Answer
C) $65,000
Annual depreciation = ($95,000 - $15,000) ÷ 8 = $10,000. After 3 years: $95,000 - (3 × $10,000) = $65,000. Book value equals original cost minus accumulated depreciation.
Why This Is the Correct Answer
The correct answer is A) $65,000 because straight-line depreciation spreads the depreciable amount evenly over the asset's useful life. The depreciable amount is $95,000 - $15,000 = $80,000, which divided by 8 years equals $10,000 annual depreciation. After 3 years, total accumulated depreciation is $30,000, making the book value $95,000 - $30,000 = $65,000.
Why the Other Options Are Wrong
Option B: $80,000
This answer of $75,000 represents only 2 years of depreciation ($95,000 - $20,000), indicating the calculation stopped short of the full 3-year period required.
Option D: $75,000
This answer of $80,000 represents only 1.5 years of depreciation ($95,000 - $15,000), showing a significant miscalculation in either the time period or depreciation rate.
Memory Technique
Remember 'SLD-CAB': Straight-Line Depreciation = Cost minus Accumulated depreciation gives Book value. The salvage value is only used to calculate the depreciable base, not subtracted at the end.
Reference Hint
Look up 'Depreciation Methods' or 'Straight-Line Depreciation' in the accounting or business management section of your contractor reference manual.
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