Inventory & Depreciation
Asset Valuation
Calculating Book Value and Salvage (residual) Value.
Questions use machinery, vehicles, and office equipment scenarios with purchase cost, useful life in years, and salvage value. Gain/loss questions add a sale price and ask for the resulting gain or loss. Multi-step questions ask for Book Value at a specific year rather than in the first or final year.
What the exam tests
Definition-to-Term Identification
Match a definition to its term: 'cost of an asset less accumulated depreciation' = Book Value; 'what the asset is worth at the end of its useful life' = Salvage (Residual) Value.
Standard Book Value Calculation
Book Value = Historical Cost − Accumulated Depreciation. Subtract total depreciation to date from the original cost.
Depreciation Formula Application
Use Salvage Value as a variable in depreciation formulas. Straight-Line: (Cost − Salvage Value) ÷ Useful Life = Annual Expense.
Multi-Step Valuation Over Time
Calculate Book Value at a future point: determine annual depreciation, multiply by years elapsed, subtract from original cost.
Gain and Loss Determination
Selling an asset: Capital Gain = Sale Price − Book Value (if positive); Capital Loss = Book Value − Sale Price (if positive).
Narrative Error Identification
A wrong depreciation method or valuation error is described; identify the financial impact or the correction required.
Structural Recognition
Key rules
- ›Book Value = Historical Cost − Accumulated Depreciation.
- ›Accumulated Depreciation is a contra-asset. It increases with Credits and reduces the asset's carrying value.
- ›Book Value decreases each period as depreciation is recorded; it cannot fall below Salvage Value under straight-line.
Common traps
- !Subtracting only one year's depreciation when the question asks for accumulated depreciation over multiple years.
Algebraic Application
Key rules
- ›If Cost, Annual Expense, and Useful Life are known → Salvage Value = Cost − (Annual Expense × Useful Life).
- ›If Cost, Salvage Value, and Annual Expense are known → Useful Life = (Cost − Salvage Value) ÷ Annual Expense.
- ›Rearrange the depreciation formula to isolate whichever variable is missing.
Common traps
- !Solving for Salvage Value using Book Value instead of original Cost when the asset has been partially depreciated.
Gain and Loss Logic
Key rules
- ›Compare Sale Price to Book Value at the date of sale, not to original cost.
- ›Sale Price > Book Value → Gain on Disposal (debit Cash, credit Gain on Disposal, remove asset and accumulated depreciation).
- ›Sale Price < Book Value → Loss on Disposal (debit Cash + Loss on Disposal, credit asset and accumulated depreciation).
Common traps
- !Comparing sale price to original cost instead of current Book Value.
Arithmetical Accuracy
Key rules
- ›Calculate Accumulated Depreciation = Annual Expense × Years Elapsed before finding Book Value.
- ›Verify: Original Cost − Accumulated Depreciation = Book Value; Accumulated Depreciation never exceeds Cost − Salvage Value.
Common traps
- !Allowing Book Value to drop below Salvage Value in a straight-line calculation.
Interpretive Data Extraction
Key rules
- ›Key variables: original cost, salvage (residual) value, useful life, years elapsed, and sale price.
- ›Ignore asset descriptions, location, or purpose. Extract only the numeric variables.
Common traps
- !Using the asset's current market value instead of Book Value when calculating gain or loss.
Try one
Which term is defined as the cost of an asset less its accumulated depreciation?
Book Value = Historical Cost − Accumulated Depreciation.
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