The total cost of an asset less its accumulated depreciation is called:
A) Historical cost.
B) Book value.
C) Present value.
D) Current (market) value.
E) Replacement cost.
The correct answer and explanation is :
The correct answer is B) Book value.
Explanation:
The book value of an asset refers to the value of the asset as recorded in the company’s financial records. It is calculated as the original cost of the asset minus the accumulated depreciation. The purpose of depreciation is to allocate the cost of a long-term asset over its useful life, reflecting the asset’s consumption or wear and tear over time.
The formula for book value is:
[
\text{Book Value} = \text{Original Cost of the Asset} – \text{Accumulated Depreciation}
]
Why is it called “Book Value”?
The term “book value” comes from the fact that it represents the value recorded in the company’s books or accounting records. It is the value used for financial reporting and tax purposes, and it reflects the asset’s historical cost adjusted for depreciation.
For example, if a machine was originally purchased for $50,000 and has accumulated $20,000 in depreciation over the years, its book value would be $30,000 ($50,000 – $20,000).
Clarification of Other Options:
- A) Historical cost refers to the original cost paid to acquire the asset, and it doesn’t account for depreciation. This is different from book value, which subtracts depreciation.
- C) Present value refers to the current value of a future cash flow, discounted back to the present time, and is unrelated to depreciation.
- D) Current (market) value is the price at which an asset could be sold in the market today. It is often different from book value, as market conditions and asset wear may affect the current value.
- E) Replacement cost is the cost to replace an asset with a similar one at current market prices, which can also be different from its book value, depending on how much depreciation has been applied.
In summary, book value is the net value of an asset after subtracting accumulated depreciation, making it the most accurate term for what is being asked in the question.