Equipment costing $120,000 is being depreciated over 10 years using straight-line method with a $20,000 salvage value. What is the equipment's book value after 6 years?
Correct Answer
B) $52,000
Annual depreciation = ($120,000 - $20,000) ÷ 10 = $10,000. After 6 years: Total depreciation = $10,000 × 6 = $60,000. Book value = $120,000 - $60,000 = $60,000. Wait, that's not right. Book value = $120,000 - $60,000 = $60,000. Actually, $52,000 is incorrect. The correct answer should be $60,000, but since that's not option A, let me recalculate. Book value after 6 years = $120,000 - ($10,000 × 6) = $60,000.
Why This Is the Correct Answer
The correct answer is actually A) $60,000, not D) $52,000 as stated. Using straight-line depreciation, the annual depreciation is ($120,000 - $20,000) ÷ 10 years = $10,000 per year. After 6 years, total accumulated depreciation is $10,000 × 6 = $60,000. The book value equals the original cost minus accumulated depreciation: $120,000 - $60,000 = $60,000.
Why the Other Options Are Wrong
Option A: $40,000
This represents 48% of the original cost but doesn't follow the straight-line depreciation formula correctly.
Option C: $60,000
This would be the book value if there were no salvage value and the equipment depreciated $80,000 over 8 years, which doesn't match our scenario.
Option D: $48,000
This appears to be an error in the provided answer key. The calculation doesn't support this value using proper straight-line depreciation methods.
Memory Technique
Remember 'SOAP': Salvage value affects Only Annual depreciation calculation, not the final subtraction. Book value = Original cost - Accumulated depreciation.
Reference Hint
Look up 'Depreciation Methods' or 'Straight-Line Depreciation' in the accounting or business management section of your contractor reference manual.
More Business & Finance Questions
A general contractor purchases equipment worth $45,000 with a useful life of 9 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
What is the typical recommended coverage amount for general liability insurance for a small to medium-sized general contracting business?
A contractor estimates startup costs of $75,000 for equipment, $25,000 for initial inventory, $15,000 for insurance premiums, and $10,000 for working capital. They can finance 70% of the total. How much cash do they need?
When establishing professional relationships with architects and engineers, what is the most important factor for a general contractor to consider?
A partnership agreement for a construction company should address all of the following EXCEPT:
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?
A contractor's business plan projects first-year revenue of $500,000 with a 15% net profit margin. If actual revenue is $450,000 with the same profit margin, what is the variance in net profit?
Using the Modified Accelerated Cost Recovery System (MACRS), construction equipment is typically depreciated over how many years?
A contractor is comparing financing options for equipment purchase. Option A: $80,000 cash purchase. Option B: $20,000 down, $65,000 financed at 6% for 4 years. What is the total cost of Option B?
A contractor purchases equipment using a capital lease with a present value of $120,000. How should this be recorded on the balance sheet?