Final answer:
The book value of an asset on a bank's balance sheet represents its historical cost minus accumulated depreciation, not the current market value or replacement cost. This value is part of the calculations that lead to determining the bank's net worth or capital, which is the difference between total assets and total liabilities.
Step-by-step explanation:
The student's question touches on the accounting term known as book value, which indeed represents the historical cost of an asset minus accumulated depreciation (for depreciable assets), rather than its current market value or replacement cost. In the context of a bank's balance sheet, assets like cash, reserves at the Federal Reserve, and loans made to customers are listed at their book value. The liability represents what the bank owes, including deposits made by customers. The difference between the bank's total assets and total liabilities is known as the net worth or bank capital. A healthy bank will have a positive net worth, indicating that the value of its assets exceeds its liabilities.
Therefore, the book value of an asset on a balance sheet is more about historical record-keeping and less about the asset's current financial worth in the market. It's a reflection of what was originally paid for the asset, along with adjustments like depreciation, rather than its modern-day valuation or sale price.