Imagine you are speaking to someone who knows nothing about accounting, financial statements, assets or expenses....

Imagine you are speaking to someone who knows nothing about accounting, financial statements, assets or expenses. Explain what is book value is. Now explain the difference between book value and disposal value. Which one is relevant when making a business decision and why is the other one not relevant?

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Expert Solution

Book value of an asset is value recorded in the books of accounts of a company. It is carrying value less accumulated depriciation. Book value is what shown in the balance sheet of the company.

Suppose, an asset is purchased for $10000. It's useful life is 5 years. Means every depriciation, depriciation will be charged for $ 2,000. (Cost / Useful life). Now suppose after 3 years, the book value of that asset will be =

Cost - depriciation For 3 years

$10000 - ($2000 × 3 )

= $4000

So, at the end of 3 years, book value of the asset is $4000.

It is the book value of the asset on which any adjustment is to be done, whether up valuation or down valuation. Book value of the asset does not necessarily means fair market value.

Disposal value - Disposal value of an asset means the value at which company wants to dispose off or sale the asset. This does not necessarily means fair market value. The disposal value is calculated in such a manner that the company is not at loss. Atleast, it should be minimum the book value of the asset on the date of sale.

Disposal value may be the book value for calculation purposes, but accounting treatment is different. Because the purpose is changed.

Relevance of book value or disposal value is dependent on the type of business decision the company makes. Suppose, if the business decision is any new investment, then book value is important. If business decision is of disinvestment, then disposal value is important. So, it depends on the type of business decision.

ekkarill92 answered 1 year ago

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