Improvement cost new is $800,000. Separately supported improvement depreciation deductions of $120,000, $80,000, $40,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
Correct Answer
A) $560,000
800000−(120000+80000+40000)+0 = 560000. Common errors: deducting only the largest depreciation item gives $680,000; not deducting any depreciation gives $800,000; leaving out the $40,000 item gives $600,000.
Why This Is the Correct Answer
Option A is correct because the three nonoverlapping deductions total $240,000, and $800,000 - $240,000 = $560,000. Since the deductions do not overlap and are not already excluded from cost new, each is subtracted once. No site value is included.
Why the Other Options Are Wrong
Option B: $600,000
Option B is wrong because $600,000 leaves out the $40,000 item: $800,000 - ($120,000 + $80,000) = $600,000. All three deductions apply, giving $560,000.
Option C: $680,000
Option C is wrong because $680,000 deducts only the largest item: $800,000 - $120,000 = $680,000. The $80,000 and $40,000 deductions must also be subtracted, giving $560,000.
Option D: $800,000
Option D is wrong because $800,000 is cost new with no depreciation deducted. Subtracting the $240,000 total gives $560,000.
Sum the losses, subtract once
Add every separate depreciation item into one total, then subtract that total from cost new.
How to use: Use this when a cost question lists several separate depreciation amounts.
Exam Tip
Make sure every listed nonoverlapping deduction is included. Choices that drop one item are common traps.
Common Mistakes to Avoid
- -Deducting only one of several depreciation items
- -Forgetting a smaller item in the list
- -Adding site value when the question excludes it
Concept Deep Dive
Analysis
This question tests the breakdown idea that total depreciation is the sum of separately estimated, nonoverlapping items. Add $120,000 + $80,000 + $40,000 = $240,000 and subtract from $800,000. No site value is added, so the answer is $560,000.
Background Knowledge
Under the breakdown method, total depreciation is found by adding all individual estimates of physical, functional and external loss. Each item should be counted once and should not overlap with any other.
Real-World Application
An appraiser estimates physical deterioration of $120,000, functional obsolescence of $80,000 and external obsolescence of $40,000 for a large older house. With $800,000 cost new, the depreciated improvement value is $560,000.
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