An inspection system with an acquisition cost of ¥12 million is depreciated by the straight-line method over a useful life of 5 years with a residual value of zero. Which is its book value (undepreciated balance) at the end of the third year?

Answer: A. ¥4.8 million

The straight-line method allocates the same amount as an expense every year, so annual depreciation is (12 − 0) ÷ 5 = ¥2.4 million. Accumulated depreciation for three years is 2.4 × 3 = ¥7.2 million, so the book value is 12 − 7.2 = ¥4.8 million. Depreciation is the procedure of allocating the acquisition cost of long-lived equipment as an expense over the period of use; the cash was already paid at the time of purchase.

• A. Correct. It is the acquisition cost minus three years of accumulated depreciation.
• B. This is the accumulated depreciation for three years. The book value is the acquisition cost minus this amount.
• C. This is the book value at the end of the first year.