Practice Question

1. Louise looks at the balance sheet for her business and remembers that she bought a large piece of equipment for $30,000 a few years ago. However, the balance sheet shows a book value of only $5,000 for this equipment. She knows she paid $30,000, so she thinks the balance sheet has the wrong information. How would you explain the situation to her?

The book value in the balance sheet does not show the cost of the item; it shows the cost less accumulated depreciation.
The book value in the balance sheet always shows the cost of the asset, so the balance sheet has the wrong information.
The cost of the item is a current asset and does not belong in the fixed asset area.