A building cost $2,500,000 to construct. After 8 years, it has accrued depreciation of $400,000. Using straight-line depreciation, what is the annual depreciation amount?
Correct Answer
A) $50,000
Annual depreciation = Total accrued depreciation ÷ Number of years = $400,000 ÷ 8 = $50,000 per year.
Why This Is the Correct Answer
Option A is correct because it properly applies the straight-line depreciation formula: Annual Depreciation = Total Accumulated Depreciation ÷ Number of Years. Using the given data: $400,000 ÷ 8 years = $50,000 per year. This represents the consistent annual depreciation amount under the straight-line method. The original construction cost of $2,500,000 is not needed for this specific calculation since we already have the total depreciation amount.
Why the Other Options Are Wrong
Option B: $62,500
This incorrectly uses the original construction cost in the calculation, likely computing $2,500,000 ÷ 40 years (assuming a 40-year life) = $62,500, which ignores the given depreciation data and makes unsupported assumptions about useful life.
Option C: $312,500
This appears to subtract the total depreciation from the original cost ($2,500,000 - $400,000 = $2,100,000) and then divide by something, but this doesn't follow any correct depreciation calculation method.
Option D: $262,500
This likely represents the remaining book value divided by remaining years or some other incorrect manipulation of the numbers, but doesn't follow the proper straight-line annual depreciation calculation.
The TIME DIVIDE Rule
TIME DIVIDE: Total depreciation ÷ Time period = Annual amount. Remember 'What happened over TIME, DIVIDE by time to get the yearly rate.'
How to use: When you see accumulated depreciation over multiple years, immediately think TIME DIVIDE - take the total depreciation and divide by the number of years to find the annual amount.
Exam Tip
Don't get distracted by the original construction cost when you already have the total depreciation amount - focus only on the depreciation and time period given.
Common Mistakes to Avoid
- -Using original cost instead of accumulated depreciation
- -Assuming a standard useful life not given in the problem
- -Calculating remaining value instead of annual depreciation
Concept Deep Dive
Analysis
This question tests understanding of straight-line depreciation calculation in real estate appraisal, specifically the cost approach method. Straight-line depreciation assumes equal annual depreciation amounts over the useful life of a building. The key insight is that we're given the total accumulated depreciation over a known time period and need to calculate the annual rate. This is a reverse calculation from the typical depreciation problems where annual rates are given.
Background Knowledge
Straight-line depreciation allocates equal depreciation amounts each year over an asset's useful life, calculated as (Cost - Salvage Value) ÷ Useful Life. In appraisal, this method is commonly used in the cost approach to estimate accrued depreciation from all causes.
Real-World Application
Appraisers use this calculation when analyzing comparable sales where they know a building's age and current depreciation to estimate annual depreciation rates for applying to subject properties of similar construction and age.
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