Which best describes the relationship between replacement cost and accumulated depreciation?

The statement that replacement cost minus accumulated depreciation equals actual cash value is accurate and reflects a fundamental concept in property valuation. The actual cash value (ACV) method is commonly used in insurance to determine how much a property is worth at a specific point in time.

Replacement cost refers to the amount it would take to replace a property with a similar one, using current materials and standards, without factoring in depreciation. Accumulated depreciation represents the reduction in value of the property over time due to factors like wear and tear, age, and obsolescence.

When you subtract accumulated depreciation from the replacement cost, you arrive at the actual cash value. This is crucial for insurance calculations, as it helps determine how much an insured party would receive in the event of a loss of property. This method acknowledges that while a property might cost a certain amount to replace, its actual value is diminished by various factors over time, making this calculation essential in assessing losses and claim amounts.