Question

Explain the difference between book value and market value. Give an example of when a book value and market value are significantly different for a (1) current asset and (2) fixed asset.

Answer 1

Book value is the real assets worth to the company. While the Market Value is the maximum value that the market is ready to pay for the asset.

Book value represents firm equity while the market value represents the market value of the asset.

Book value represent the historical or amortized or fair value of an asset while market value represent the fair value of an asset only.

Example:

There are instances when the difference between the book value and the market value occurs. like when there is an appreciation/depriciation of the price of an assets after the asset has been acquired by the firm. In this example the firm would record the asset in the buying price while the market price would be something different. This usually happen with the financial assets, why?

Well for financial assets recording of financial assets are varries as Amortized Cost, Fair Value through OCI and Fair Value through P&L. Now FVTPL creates no book value and market value difference as daily mark to market is done but if rest two accounting recording process is follows it creates differences.

Also difference occurs in fixed asset during the depriciation of an fixed asset as firm would depriciate the asset while the market would react to the asset differently thus creating the difference.