Correcting a deficiency in the improvements by retrofit would cost $14,000 today and is economically justified. The current cost new of the improvements already includes $9,000, at current prices, for the equivalent item installed during new construction. What amount should be deducted for the deficiency so that the cost is not counted twice?
Correct Answer
A) $5,000
14000−9000 = 5000. Common errors: deducting the full retrofit cost without removing the allowance already in the base gives $14,000; adding the included allowance instead of subtracting it gives $23,000; deducting only the allowance already in the base gives $9,000.
Why This Is the Correct Answer
Option A is correct because the cost new base already includes $9,000 for the item, so deducting the full $14,000 retrofit cost would count that $9,000 twice. The deduction is therefore the retrofit cost minus the included allowance, $14,000 - $9,000 = $5,000.
Why the Other Options Are Wrong
Option B: $9,000
Option B, $9,000, is wrong because it deducts only the allowance already in the cost new base. The deduction should be the retrofit cost less that allowance, $14,000 - $9,000 = $5,000.
Option C: $14,000
Option C, $14,000, is wrong because it deducts the full retrofit cost without removing the $9,000 already included in cost new, which double counts that amount. The correct deduction is $5,000.
Option D: $23,000
Option D, $23,000, is wrong because it adds the included allowance to the retrofit cost ($14,000 + $9,000) instead of subtracting it. The correct deduction is $14,000 - $9,000 = $5,000.
Subtract what's already in
Retrofit cost minus what cost new already includes is the extra cost of fixing it later.
How to use: Use this when a question says the cost new base already contains an allowance for the item being cured.
Exam Tip
Watch for wording that an amount is already included in cost new; that is a signal to subtract it to avoid double counting.
Common Mistakes to Avoid
- -Deducting the full retrofit cost when cost new already includes the item
- -Adding the included allowance to the retrofit cost
- -Deducting only the included allowance
Concept Deep Dive
Analysis
This question tests avoiding double counting when cost new already includes an item. The current cost new base already contains $9,000 for the equivalent item as it would be installed in new construction. Retrofitting costs $14,000, so the extra cost attributable to curing the deficiency is $14,000 - $9,000 = $5,000.
Background Knowledge
When a curable deficiency is measured, the cost new base and the depreciation must be compatible so the same cost is not counted twice. If cost new already includes the item as if installed new, only the excess cost of adding it after the fact is deducted.
Real-World Application
An appraiser's cost new figure for a house already includes the cost of an item as if installed during construction, but the house lacks it and must be retrofitted at higher cost. The appraiser deducts only the difference between the retrofit cost and the included amount.
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