Julio has a house worth $220,000. He has a $175,000 mortgage. Julio says that in this situation, his asset equity is really only $45,000. Which statement explains whether Julio is correct?
Answer
A
Julio is not correct because the same item cannot represent both an asset and a liability.
B
Julio is correct because he can pay $45,000 and have no more liabilities.
C
Julio is not correct because the house cannot be worth more than the mortgage.
D
Julio is correct because the $45,000 equity in the house is the real asset.
Explanation
Julio’s equity is the house’s value minus the mortgage he still owes: $220,000 − $175,000 = $45,000. That $45,000 is the portion of the house’s value he owns after accounting for the mortgage, so D is correct. The house itself is still worth $220,000; the $45,000 describes Julio’s equity in it.
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