A contractor purchases a truck for $60,000. After 5 years, it has accumulated depreciation of $35,000. What is the truck's book value?
Correct Answer
A) $25,000
Book value equals original cost minus accumulated depreciation. $60,000 - $35,000 = $25,000.
Why This Is the Correct Answer
Book value represents the current worth of an asset on a company's balance sheet after accounting for depreciation. It is calculated using the fundamental accounting equation: Book Value = Original Cost - Accumulated Depreciation. In this case, the truck was purchased for $60,000 and has depreciated by $35,000 over 5 years, leaving a book value of $25,000. This represents what the asset is worth on paper for accounting and tax purposes.
Why the Other Options Are Wrong
Option B: $35,000
This option ($35,000) represents the accumulated depreciation amount, not the book value. This is a common mistake where test-takers confuse the depreciation expense with the remaining asset value.
Option C: $60,000
This option ($60,000) represents the original purchase price of the truck, ignoring the effects of depreciation over time. The book value must account for the decrease in value due to use and age.
Option D: $95,000
This option ($95,000) incorrectly adds the original cost and accumulated depreciation together, which has no basis in accounting principles and would suggest the asset increased in value.
Memory Technique
Think 'Book value = what's LEFT' - you start with what you paid, subtract what's gone (depreciation), and what's LEFT is your book value.
Reference Hint
Look up 'Depreciation and Asset Valuation' in the Business and Finance chapter of your contractor reference manual, specifically sections on accounting principles and asset management.
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