A company’s financial statements show a building at its original cost less accumulated accounting depreciation. This figure is the building’s:
Correct Answer
C) Book value
Book value is the amount, usually reduced by accounting depreciation, that reflects property cost on financial statements. It is an accounting figure, not market value; insurable value concerns insurance coverage, and salvage value is the value at the end of economic life.
Why This Is the Correct Answer
Option C is correct because book value is the amount, usually reduced by accounting depreciation charges, that reflects property cost as shown on financial statements. It is an accounting figure based on historical cost. It can differ greatly from what the building would sell for.
Why the Other Options Are Wrong
Option A: Market value
Option A, market value, is wrong because market value is the most probable price in a competitive, open market, not a figure built from original cost less accounting depreciation.
Option B: Insurable value
Option B, insurable value, is wrong because insurable value concerns the amount of insurance coverage for the insurable components of a property, not the cost basis on financial statements.
Option D: Salvage value
Option D, salvage value, is wrong because salvage value is the value of a property or its components at the end of its economic life, not original cost less accumulated depreciation.
Book value lives in the books
If the number comes from the company's accounting books, cost minus depreciation, it is book value.
How to use: Use this when a question describes a figure from financial statements.
Exam Tip
Original cost less accounting depreciation on financial statements is book value; it is not a market measure.
Common Mistakes to Avoid
- -Treating book value as market value
- -Confusing accounting depreciation with market-derived depreciation
- -Mixing up salvage value with book value
Concept Deep Dive
Analysis
This question tests the difference between accounting value and market-based value concepts. A building shown on financial statements at original cost less accumulated accounting depreciation is carried at book value. The other choices are different types of value with different definitions.
Background Knowledge
Book value comes from accounting: original cost minus depreciation charges taken for tax or financial reporting. Accounting depreciation follows schedules and does not measure loss in market value, so book value can be far above or below market value. Appraisers distinguish it from market value, insurable value, salvage value and other value types.
Real-World Application
A company's balance sheet shows a rental house it bought decades ago at a low book value after years of depreciation. When the company hires an appraiser for a sale, the appraiser's market value opinion is much higher because the market has appreciated, showing that book value and market value measure different things.
More Market Questions
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