Book vs. economic value: Posting
Book value is what is paid for an asset; economic value is what can actually be obtained for the asset in actual, current market terms. A good example of an asset with relatively close book and economic value would be land. Although the real estate market goes through highs and lows, in general the value of land does not depreciate over the long-term like a piece of equipment. In contrast, the purchase of a piece of technology such as hardware or software as an asset demonstrates a wide discrepancy between book and economic value given that new computer systems are being developed all the time and technology very quickly becomes obsolete. Unlike land, no matter how well-maintained a piece of equipment might be, depreciation is an inevitable consequence of purchasing such an asset and the value of a piece of technology will literally go down as soon as the asset is purchased. Even the most advanced smartphone from a few years ago is considered ancient in technological terms.
A liability with close book and economic values would be a fixed rate mortgage on a piece of property that did not change, regardless of the interest rate. In contrast, a liability with a different economic value would be that of a warranty liability,...
Although "the liability amount is recorded at the time of the sale...the liability will be reduced by the actual expenditures to repair or replace the product" and is contingent upon whether the warranty is actually made use of by the customer ("Warranty liability," 2015).
Reference
Warranty liability. (2015). Accounting Coach. Retrieved from:
http://www.accountingcoach.com/terms/W/warranty-liability
Response to student 1
I would disagree based upon personal experience to some extent that a car's initial value is close to its economic value later on. With the exception of some classic, vintage cars, the value of a vehicle depreciates almost immediately after it leaves the lot much like a piece of equipment like a back hoe or excavator. I do think that rent is a good example of a relatively stable liability, particularly if the rent is negotiated at a fixed rate for a specified period of time. It is certainly more stable than employee stock options which are highly volatile although even rent can suddenly increase, depending on the nature of the contract.…
