A building has an effective age of 15 years and a total economic life of 60 years. Using the age-life method, what is the percentage of accrued depreciation?
Correct Answer
A) 25%
Age-life depreciation = Effective Age ÷ Total Economic Life. 15 ÷ 60 = 0.25 or 25%. This represents the percentage of the building's value that has been lost due to all forms of depreciation.
Why This Is the Correct Answer
Option A (25%) is correct because the age-life method formula is straightforward: Effective Age ÷ Total Economic Life = Accrued Depreciation Percentage. Substituting the given values: 15 years ÷ 60 years = 0.25 = 25%. This means that 25% of the building's original value has been lost due to depreciation over its 15-year effective age. The remaining 75% represents the building's current value as a percentage of its original cost.
Why the Other Options Are Wrong
Option B: 75%
Option B (75%) represents the remaining value percentage, not the accrued depreciation. This is the complement of the depreciation percentage (100% - 25% = 75%), which shows how much value remains rather than how much has been lost.
Option C: 15%
Option C (15%) incorrectly uses just the effective age without dividing by the total economic life. This represents the number of years of effective age, not the percentage of depreciation that has occurred.
Option D: 4%
Option D (4%) appears to be the result of incorrectly dividing total economic life by effective age (60 ÷ 15 = 4), which reverses the proper formula and doesn't represent any meaningful depreciation concept.
EATS Formula
EATS: Effective Age Top, Total economic life bottom, then Subtract from 100% for remaining value. Remember 'The building EATS away its value over time.'
How to use: When you see an age-life depreciation question, immediately think EATS - put the Effective Age on Top of the fraction with Total economic life on the bottom. This gives you depreciation percentage directly.
Exam Tip
Always double-check whether the question asks for accrued depreciation percentage or remaining value percentage - they are complements that add up to 100%.
Common Mistakes to Avoid
- -Confusing accrued depreciation percentage with remaining value percentage
- -Using actual age instead of effective age in the calculation
- -Reversing the formula by putting total economic life in the numerator
Concept Deep Dive
Analysis
The age-life method is a fundamental depreciation calculation technique used in the cost approach to valuation. It assumes that depreciation occurs at a uniform rate over the economic life of a building, making it a straight-line depreciation method. The effective age represents the apparent age of the building based on its condition and utility, which may differ from its actual chronological age. Total economic life is the period over which the building is expected to contribute value to the property, after which it would typically be demolished or require major renovation.
Background Knowledge
The age-life method assumes that buildings depreciate uniformly over their economic life, making it useful for typical residential and commercial properties. Appraisers must distinguish between actual age (chronological) and effective age (apparent condition-based age) when applying this method.
Real-World Application
An appraiser evaluating a 15-year-old office building would use the age-life method as one component of the cost approach, helping determine the depreciated value of improvements separate from land value for property tax assessments or insurance purposes.
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