CSLB Law & Business ExamBusiness FinancesMedium
A contractor is preparing for tax season and needs to calculate the straight-line depreciation for a new piece of equipment. The equipment cost $60,000, has an estimated useful life of 5 years, and a salvage value of $5,000. What is the annual depreciation expense for this equipment?
- A$11,000
- B$12,000
- C$13,000
- D$10,000
Show answer & explanationAnswer & explanation
Correct answer: A. $11,000
Straight-line depreciation is calculated as (Cost - Salvage Value) / Useful Life. So, ($60,000 - $5,000) / 5 years = $55,000 / 5 = $11,000 per year.
Why the other options are wrong
- B. This would be the result if the salvage value was not considered at all ($60,000 / 5 years).
- C. This is an incorrect calculation that does not align with the straight-line depreciation formula.
- D. This would be the result if the salvage value was incorrectly added instead of subtracted.
Straight-Line Depreciation
Straight-line depreciation is an accounting method used to allocate the cost of a tangible asset evenly over its useful life. It is the simplest and most common depreciation method.
- Formula: (Asset Cost - Salvage Value) / Useful Life
- Results in the same depreciation expense each year
- Salvage value is the estimated resale value at the end of its useful life
Memory trick: Straight-Line: 'Cost minus Salvage, then Divide by Life' – makes the value decline evenly, like a straight line.