Which one of the following statements regarding the book value of an asset is correct?

• A. The book value of an asset increases over time as depreciation is recorded.
• B. The book value of an asset is the amount the company expects to receive when selling the asset.
• C. The book value of an asset is always equal to its current market value.
• D. The book value of an asset is calculated as its original cost minus accumulated depreciation.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of 'book value' in financial accounting. The book value of an asset represents its value on the company's accounting records, calculated as the original cost of the asset minus accumulated depreciation.
2. Step 2: Recall that depreciation is the systematic allocation of the cost of an asset over its useful life. As depreciation is recorded, the accumulated depreciation increases, reducing the book value of the asset over time.
3. Step 3: Clarify that the book value is not the same as the market value. The market value is the price at which the asset could be sold in the open market, which may differ from the book value due to market conditions or other factors.
4. Step 4: Note that the book value does not represent the amount the company expects to receive when selling the asset. Instead, it is purely an accounting measure based on historical cost and depreciation.
5. Step 5: Conclude that the correct statement is: 'The book value of an asset is calculated as its original cost minus accumulated depreciation.' This aligns with the definition and accounting treatment of book value.