The book value of an asset is equal to the:
A) asset’s fair value less its historical cost
B) blue book value relied on by secondary markets
C) asset’s cost less accumulated depreciation
The correct answer and explanation is :
The correct answer is:
C) asset’s cost less accumulated depreciation
Explanation:
The book value of an asset represents the value of the asset according to the financial records of a company. It is calculated by subtracting the accumulated depreciation from the asset’s original cost. This formula can be expressed as:
Book Value = Original Cost of the Asset – Accumulated Depreciation
Key components:
- Original Cost of the Asset: This refers to the amount a company paid for the asset when it was initially acquired. It could be the purchase price or any other cost directly related to getting the asset ready for use.
- Accumulated Depreciation: Over time, the value of tangible assets (such as buildings, equipment, or machinery) tends to decrease due to wear and tear, obsolescence, or age. Depreciation is the accounting method used to allocate the cost of these assets over their useful life. The accumulated depreciation refers to the total depreciation charged on the asset since its acquisition.
Why not the other options?
- A) asset’s fair value less its historical cost: This option is incorrect because the book value is not directly related to fair value. Fair value refers to the market value or the price that an asset would fetch if sold in an open market, which may differ from the historical cost. Book value does not typically take into account the asset’s current market conditions or changes in the economy.
- B) blue book value relied on by secondary markets: The “blue book value” typically refers to a valuation in used car markets or similar secondary markets, where assets are priced based on supply and demand. This is not how the book value is calculated in financial accounting. Book value is based on historical cost and depreciation, not on market conditions.
Thus, the book value represents an accounting concept grounded in the original cost of an asset minus the depreciation accumulated over time, offering a static measure of value, as opposed to fluctuating market values.