The total cost of an asset less its accumulated depreciation is called:
A Present value
B Replacement cost.
C Historical cost.
D Book value.
E Current (market) value.
The correct answer and explanation is :
The correct answer is D: Book value.
Explanation:
The book value of an asset refers to its value as recorded on the balance sheet, which is the original cost of the asset minus its accumulated depreciation (or amortization, for intangible assets). Over time, as an asset is used or its value declines, it loses value, and this loss is reflected as depreciation. The book value helps to determine the asset’s remaining value after accounting for this depreciation.
Key Concepts:
- Original Cost: The initial amount paid to acquire the asset, including any costs necessary to prepare the asset for use.
- Accumulated Depreciation: Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. The accumulated depreciation is the total depreciation charged against an asset since it was put into use.
- Book Value: The book value of an asset is calculated by subtracting the accumulated depreciation from the original cost. Mathematically, this can be expressed as:
[
\text{Book Value} = \text{Original Cost} – \text{Accumulated Depreciation}
]
For example, if a machine was purchased for $50,000 and has accumulated $20,000 in depreciation, the book value would be $30,000.
Other Options:
- A: Present value refers to the current value of future cash flows, discounted at an appropriate rate. It does not relate to the concept of depreciation or the remaining value of an asset.
- B: Replacement cost refers to the cost to replace an asset with one of similar utility, not the book value or the net of depreciation.
- C: Historical cost refers to the original purchase price of an asset, not adjusted for depreciation.
- E: Current (market) value refers to the value of an asset in the market at the present time, which can fluctuate and is often higher or lower than the book value.
Thus, book value is the most accurate term when referring to an asset’s value after subtracting its accumulated depreciation.