Improvement cost new is $1,850,000. Separately supported improvement depreciation deductions of $310,000, $620,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
Correct Answer
A) $920,000
1850000−(310000+620000)+0 = 920000. Common errors: leaving out the $620,000 item gives $1,540,000; leaving out the $310,000 item gives $1,230,000; not deducting any depreciation gives $1,850,000.
Why This Is the Correct Answer
Option A is correct because total depreciation is the sum of the separate estimates, $310,000 + $620,000 = $930,000. Deducting that from $1,850,000 leaves $920,000 of depreciated improvement value, with no site included.
Why the Other Options Are Wrong
Option B: $1,230,000
Option B, $1,230,000, deducts only the $620,000 item: $1,850,000 - $620,000 = $1,230,000. The $310,000 item must also be deducted, giving $920,000.
Option C: $1,540,000
Option C, $1,540,000, deducts only the $310,000 item: $1,850,000 - $310,000 = $1,540,000. The $620,000 item must also be deducted, giving $920,000.
Option D: $1,850,000
Option D, $1,850,000, is cost new with no depreciation deducted. Subtracting both items, $1,850,000 - $930,000, gives $920,000.
Sum the Losses First
Add the separate losses into one total, then subtract once from cost new. One combined bite is easier to check than several.
How to use: Use this when a question lists two or more depreciation deductions.
Exam Tip
Count the deductions listed in the stem and make sure your answer subtracts every one of them.
Common Mistakes to Avoid
- -Deducting only one of several depreciation items
- -Adding a site value when the question asks for improvements only
- -Deducting overlapping items twice
Concept Deep Dive
Analysis
This question tests the breakdown idea that separate, nonoverlapping depreciation items are added together and deducted from cost new. Both deductions must be subtracted, and no site value is added.
Background Knowledge
In the breakdown method, total depreciation is found by adding the individual estimates for physical, functional and external causes. The items must not overlap, or the same loss would be deducted twice.
Real-World Application
An appraiser of an older industrial plant measures physical deterioration and functional obsolescence separately. After confirming the items do not overlap, she sums them and deducts the total from replacement cost new.
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