CSLB Law & Business ExamBusiness FinancesHard
A contractor purchases a work truck for $45,000. The truck has an estimated salvage value of $5,000 and a useful life of 8 years. Using straight-line depreciation, what is the annual depreciation expense?
- A$5,000
- B$5,625
- C$4,375
- D$6,250
Show answer & explanationAnswer & explanation
Correct answer: A. $5,000
Straight-line depreciation = (Cost − Salvage Value) ÷ Useful Life = ($45,000 − $5,000) ÷ 8 = $40,000 ÷ 8 = $5,000 per year.
Why the other options are wrong
- B. This slightly overstates the depreciable base used in the calculation.
- C. This results from dividing the full purchase cost by a wrong divisor, not the depreciable base.
- D. This ignores the salvage value entirely by dividing the full cost by useful life... incorrectly.
Straight-Line Depreciation
A method of allocating the cost of a fixed asset evenly over its useful life, accounting for its expected salvage value at the end.
- Formula: (Cost − Salvage Value) ÷ Useful Life
- Produces equal depreciation expense each year
- Used for both financial reporting and tax purposes
Memory trick: Spread the cost minus scrap value evenly across the years, like slicing a loaf equally.