Practice question · Multiple choice
A fully depreciated machine still produces daily. What does its zero book value actually mean?
Hints
- Ask what depreciation is doing: valuing the asset, or spreading its cost?
- The machine still works. Which of the two does that contradict?
Show the answer
C. That its cost has been fully allocated to past periods
Why
Depreciation spreads a historical cost across the periods that benefit from it, so book value is an allocation residue rather than a valuation. A zero balance and a productive machine simply mean the estimate was conservative, and it is why analysts compare book value with replacement cost rather than trusting either alone.
Practise Accounting for Assets
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More questions on Accounting for Assets
- Under the conservatism principle, gains should be anticipated and recognised early.
- Complete the depreciation formula.
- Net book value is cost minus accumulated depreciation, and net realisable value is what the asset would…
- The current/non-current split turns on one year, which seems arbitrary. What does the boundary actually serve?
- Match each depreciation method to its pattern.
- Which are intangible assets?