A contractor owns equipment with an original cost of $120,000 and accumulated depreciation of $45,000. What is the current book value of this equipment?
Correct Answer
D) $75,000
Book value = Original cost - Accumulated depreciation = $120,000 - $45,000 = $75,000. This represents the equipment's value on the company's financial statements.
Why This Is the Correct Answer
Book value is calculated by subtracting accumulated depreciation from the original cost of an asset. This represents the remaining value of the equipment on the company's balance sheet after accounting for wear, tear, and obsolescence over time. The calculation is: $120,000 (original cost) - $45,000 (accumulated depreciation) = $75,000 book value.
Why the Other Options Are Wrong
Option A: $120,000
This incorrectly adds the accumulated depreciation to the original cost instead of subtracting it. Book value decreases as depreciation accumulates, so adding depreciation would give an inflated and incorrect value that exceeds the asset's original purchase price.
Option B: $45,000
This represents only the accumulated depreciation amount, not the book value. Accumulated depreciation is the total amount of depreciation expense recorded against the asset over its useful life, but the book value requires subtracting this from the original cost.
Memory Technique
Remember 'Book value = Big cost - Bad depreciation' - the original Big cost minus the Bad (accumulated) depreciation gives you what's left in the books.
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