book value

Examples of book value in the following topics:

• Impairment Measurement

  • Perform a recoverability test is to determine if an impairment loss has occurred by evaluating whether the future value of the asset's undiscounted cash flows is less than the book value of the asset.
  • If the cash flows are less than book value, the loss is measured.
  • Measure the impairment loss by calculating the difference between the book value and the market value of the asset.
  • Since the asset's future undiscounted cash flows are USD 6,000, less than the USD 10,000 book value, an impairment loss has occurred.
  • Use the market value of the sewing machine, USD 20,000, and deduct the USD 10,000 book value to arrive at an impairment loss of USD 10,000.

• Loss Restoration

  • Under US GAAP, once an asset is impaired its value cannot be increased regardless of what its fair market value is; once the value of an asset is decreased, it stays at that value unless its market value declines again.
  • Under International Financial Reporting Standards, once a fixed asset has been revalued its book value can be adjusted periodically to market value using the cost model or the revaluation model.
  • If an asset becomes impaired and an impairment loss results, the asset can fall under the revaluation model that allows periodic adjustments to the asset's book value.
  • The asset's new book value can be divided by its remaining useful life to adjust the amount of depreciation expense reported on the income statement after the revaluation.
  • Only assets accounted for under the revaluation model can have their book value adjusted to market value.

• Cost of Buildings

  • Since buildings are subject to depreciation, their cost is adjusted by accumulated depreciation to arrive at their net carrying value on the balance sheet.
  • The building's net carrying value or net book value, on the balance sheet is $110,000.
  • If at a future date a building is sold due to a business relocation or other reason, any gain or loss on the sale is based on the difference between the building's net book value and the market sales price.
  • If the sale results in a gain, the excess received over the building's net book value is disclosed on the income statement as an increase to the accounting period's income.
  • If the sale results in a loss and the business receives less than book value, the loss is also disclosed on the income statement as a decrease to income.

• Impairment Recognition

  • the asset is set for disposal before the end of its useful life A loss on impairment is recognized as a debit to Loss on Impairment (the difference between the new fair market value and current book value of the asset) and a credit to the asset.
  • A loss on impairment is recognized as a debit to Loss on Impairment (the difference between the new fair market value and current book value of the asset) and a credit to the asset.The loss will reduce income in the income statement and reduce total assets on the balance sheet.
  • For an example, take a retail store that is recorded on the owner's balance sheet as a non-current asset worth USD 20,000 (book value or carrying value is USD 20,000).
  • Based on the asset's book value, assume the store has a historical cost of USD 25,000 and accumulated depreciation of USD 5,000.
  • The Loss on Impairment is calculated to be USD 8,000 (20,000 book value - 12,000 market value)

• Basic Components of Asset Valuation

  • In the case of a fixed asset, its value on the balance sheet is historical cost less accumulated depreciation, or book value.
  • Appraisals are used often to value works of art, rare books, antiques, and real estate.
  • The book value of a fixed asset asset is its recorded cost less accumulated depreciation.
  • An old asset's book value is usually not a valid indication of the new asset's fair market value.
  • However, if a better basis is not available, a firm could use the book value of the old asset.

• Cost of Equipment

  • Depreciation is a periodic reduction in an asset's value.
  • Since accounting standards state that an asset should be carried at the net book value, equipment is listed on the balance sheet at its historical cost amount.
  • The cost is then reduced by accumulated depreciation to arrive at a net carrying value or net book value.
  • When an equipment is sold, the sale of the asset can trigger a gain or a loss, depending on the difference between the equipment's net book value and its sale price.

• Reporting Equity Investments

  • At the time of purchase, goodwill can arise from the difference between the cost of the investment and the book value of the underlying assets.
  • The component that can give rise to goodwill is: the difference between the fair market value of the underlying assets and their book value .
  • To test goodwill for impairment, companies are now required to determine the fair value of the reporting units, using the present value of future cash flow, and compare it to their carrying value (book value of assets plus goodwill minus liabilities).
  • If the fair value is less than carrying value (impaired), the goodwill value needs to be reduced so that the fair value is equal to the carrying value.
  • Goodwill is an accounting concept meaning the excess value of an asset acquired over its book value due to a company's competitive advantages.

• Factors Affecting the Price of a Bond

  • A bond's book value is affected by its term, face value, coupon rate, and discount rate.
  • Note that the trading value of a bond (its market price) can vary from its face value depending on differences between the coupon and market interest rates.
  • A bond's value is measured based on the present value of the future interest payments the bond holder will receive.
  • To calculate the present value, each payment is adjusted using the discount rate.
  • Explain how a bond's value is affected by its term, face value, coupon and discount rate

• Resource Cost Write-Off

  • The term write-off describes a reduction in recognized value.
  • When the asset has been depleted to a value of zero or its value has dropped to less than its salvage value, the asset's remaining book value, as calculated by the original historical cost minus the depletion of prior years, is removed from the balance sheet through a write-off.
  • The write-off journal entry moves the asset's book value to the income statement, where it is reported as an expense or loss and reduces the accounting period's income.
  • The asset's book value (historical cost minus accumulated depletion) is the amount debited (increased) to an expense or loss account reported on the income statement for the accounting period.
  • When natural resources have their value reduced to zero they are written off.

• Goodwill Impairment

  • A software company has net assets valued at $1 million, but the company's overall value (including brand, customers, intellectual capital) is valued at $10 million.
  • In accounting, goodwill is the value of an asset that is considered intangible but has a quantifiable "prudent value" in a business.
  • Instead of deducting the value of goodwill annually over a period of maximal 40 years ( amortization ), companies are now required to determine the fair value of the reporting units, using the present value of future cash flow , and compare it to their carrying value (book value of assets + goodwill - liabilities. ).
  • If the fair value is less than carrying value (impaired), the goodwill value will need to be reduced so that the fair value is equal to carrying value.
  • If there is an indication that the book value of goodwill is greater than the recoverable value of net assets, an assessment of the recoverable value is made, and if the suspicion is correct, then an impairment expense is recorded.