A contractor purchased a truck for $45,000. After 5 years of use, the accumulated depreciation is $27,000. What is the book value of the truck?
Correct Answer
B) $18,000
Book value = Original cost - Accumulated depreciation = $45,000 - $27,000 = $18,000. This represents the remaining value of the asset on the company's books.
Why This Is the Correct Answer
Book value represents the current worth of an asset on a company's financial records after accounting for depreciation. It is calculated by subtracting the total accumulated depreciation from the original purchase price. In this case, the truck's original cost of $45,000 minus the $27,000 in accumulated depreciation equals $18,000, which is the asset's remaining book value. This figure represents what the asset is worth on paper for accounting and tax purposes.
Why the Other Options Are Wrong
Option A: $27,000
Option A ($27,000) represents the accumulated depreciation amount, not the book value. This is the total amount the asset has depreciated over the 5-year period, which gets subtracted from the original cost rather than being the final answer.
Option C: $45,000
Option C ($45,000) is the original purchase price of the truck, which doesn't account for any depreciation. Book value must reflect the decrease in value over time due to use and age.
Option D: $72,000
Option D ($72,000) incorrectly adds the original cost and accumulated depreciation together ($45,000 + $27,000). This mathematical error would suggest the asset gained value, which contradicts the concept of depreciation.
Memory Technique
Think 'Book value = what's LEFT on the books' - you start with the original cost and subtract what's been used up (depreciation) to find what's left.
Reference Hint
Look up 'Asset Depreciation' and 'Book Value' in the accounting/financial management chapter of your contractor reference manual, typically found in the business management section.
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