Let's consider the different statements to determine the correct one regarding the book value of an asset:
1. It is the fair value of the asset if the asset is sold.
- This is incorrect. The fair value of an asset represents the price at which the asset could be sold in the open market. It is not directly related to the book value.
2. It reflects the original cost of the asset less accumulated depreciation.
- This statement is correct. The book value of an asset is indeed calculated as the original cost of the asset minus the accumulated depreciation over time. This gives us an accurate representation of the asset's value on the balance sheet after accounting for wear and tear, obsolescence, or usage.
3. It is the original cost of the asset minus the depreciation expense for that asset during the year.
- This statement is incorrect. This calculation would give us the net book value for a single year, not the total accumulated depreciation over the life of the asset. Book value needs to consider all years' depreciation since the asset was purchased, not just the current year's depreciation.
4. It is the original cost at which the asset was purchased.
- This is incorrect. The original cost of the asset is its historical cost, but the book value takes into account the reduction in value due to accumulated depreciation.
Therefore, the correct statement regarding the book value of an asset is:
It reflects the original cost of the asset less accumulated depreciation.
