A contractor owns equipment with an original cost of $120,000, accumulated depreciation of $45,000, and current market value of $85,000. What is the book value of this equipment?
Correct Answer
C) $75,000
Book value = Original Cost - Accumulated Depreciation. $120,000 - $45,000 = $75,000. Market value is not used in book value calculations.
Why This Is the Correct Answer
Book value represents the accounting value of an asset on a company's balance sheet, calculated as the original purchase price minus all accumulated depreciation taken over the asset's life. The formula is straightforward: Book Value = Original Cost - Accumulated Depreciation. In this case, $120,000 - $45,000 = $75,000. Market value is irrelevant to book value calculations as it reflects current market conditions rather than accounting records.
Why the Other Options Are Wrong
Option A: $85,000
This amount ($165,000) appears to be original cost plus market value, which has no basis in accounting principles. There is no valid calculation method that would result in adding these figures together for book value determination.
Option B: $120,000
This is the original cost ($120,000) without accounting for any depreciation. Book value must reflect the reduction in value due to accumulated depreciation over time, so using only the original cost ignores years of wear and depreciation.
Memory Technique
Think 'Book value = what's left in the books' - start with what you paid (original cost) and subtract what you've written off (accumulated depreciation). The acronym 'OCA' can help: Original Cost minus Accumulated depreciation.
Reference Hint
Look up 'Asset Valuation' or 'Depreciation Methods' in your accounting or business management reference materials, typically found in chapters covering financial statements or asset management.
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