Book Value of Asset

Book Value of Asset Definition

Book Value of Assets is defined as the value of an asset in the books of records of a company or institution or an individual at any given instance. For companies, it is calculated as the original cost of the asset less accumulated depreciation and impairment costs.

Book Value of Assets Formula

Assets Book Value Formula = Total Value of an Asset – Depreciation – Other Expenses Directly Related to it
Book-Value-of-Asset

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Source: Book Value of Asset (wallstreetmojo.com)

  • Total Value of the asset = Value at which the asset is purchased
  • Depreciation = Periodic reduction in the value of the asset amortized as per standards
  • Other Cost = Include impairment cost and related costs which directly affect the cost of the asset

Examples of Book Value of Assets

Example #1

ABC Corp purchased a water purifying system for office use in 2015 at $20,000. The useful life of the purifier was estimated to be 5 years. Calculate the book value of the purifier at the end of 2017 (use the straight-line method of depreciation for calculation).

Solution

Given

  • Purchase Cost of the purifier: $20,000.
  • Useful life: 5 years

Using straight-line method of depreciation for calculation, each year depreciation value = $20,000 / 5

= $4,000

 Hence, assuming there are no other costs involved for the purifier, book value of asset at the end of 2017

Book Value Example 1

= $20,000 – 4,000 

= $16,000

Since 2017 will consider 2 cycles of depreciation.

Example #2

Big Holdings, Inc. is expanding its business of real estate and wishes to acquire Manpower Consultants, which deals in leaseLeaseLeasing is an arrangement in which the asset's right is transferred to another person without transferring the ownership. In simple terms, it means giving the asset on hire or rent. The person who gives the asset is “Lessor,” the person who takes the asset on rent is “Lessee.”read more administration and due diligence for its clients. In order to find out the book value of Manpower Consultants, Big Holdings analyzes the below data –

Given,

  • The Total Asset Value as of date: $800,000
  • Total Preferred Stock value as of date: $100,000
  • Total Common Stock value as of date: $200,000
  • Value of Patents it currently holds: $150,000

Solution

Book Value of Manpower Consultants = Total Assets – Total Liabilities

The calculation will be –

Book Value Example 2

=  $800,000 – ($100,000 + $200,000 + $150,000)

=  $350,000

Example #3

A company issues common stocks equal to 1,000,000 in the market, and as on March 31st, 2015, its total stockholder equity is $1,250,000. Calculate the book value of each stock as on that date.

Solution

Given,

  • Total number of stocks: 1,000,000
  • Total Stockholders’ equity: $1,250,000

Book Value per Stock can be calculated as follows,

Example 3

=$1,250,000 / 1,000,000

= $1.25

Advantages

Disadvantages

  • The biggest disadvantage for calculating book value is that it does not necessarily give the asset or the company’s market value. It may be close to the market value yet may or may not be the exact market value.
  • It is not the right indicator of a company’s growth. Certain companies may not rely on assets completely, and their business may be grown manifold based on the services they provide. However, book value for such firms may be much lower to their earnings ratios.

 Limitations

  • It does not denote the asset’s market value. It is that value which can be registered in the balance sheet of the company. However, there are other costs (or other factors) involved in the calculation of the asset’s market value.
  • At a given point in time, the value of a particular asset(s) may or may not be rightly calculated, which may lead to incorrect book value of the firm. Since book value depends on a lot of underlying factors, its calculation is very critical for accurate results.
  • Once again, book value gets calculated only at set frequencies or on a particular date. Hence it is difficult to rely completely on book value for valuation. This value may change over a period of a few days or maybe stagnant.

 Important Points to Note About Change in Book Value of Assets

Conclusion

Book Value may be a primitive method of calculating an asset’s value, as there are a number of new methods that give more accurate results, but it still lies at the base of a lot of reporting statements like the balance sheet. It works as a base to primary analysis of a company’s earnings, with more complicated analysis to follow as per analyst requirements. However, success is achieved only if the book value calculation is accurate and considers all its parameters.

Recommended Articles

This has been a guide to what is Book Value of Assets and its definition. Here we discuss the formula to calculate the book value of assets along with some practical examples and also its advantages and disadvantages. You can learn more about accounting from the following articles –

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