A roof with a 25-year life is 10 years old and would cost $18,000 to replace new. What is its depreciation as a short-lived item?
Correct Answer
C) $7,200, the portion of its life used up
Why this is correct: For a short-lived item, depreciation is based on its effective age relative to its total economic life. The formula is: (Effective Age / Total Economic Life) * Cost New. Here: (10 years / 25 years) * $18,000 = 0.4 * $18,000 = $7,200. Why the other choices are wrong: $18,000 is the full replacement cost, not the depreciation. $10,800 represents the remaining value (60% of $18,000), not the depreciation. 'Nothing, since the roof does not leak yet' confuses physical failure with accrued depreciation; value is lost as the item ages, not just when it breaks. Exam tip: For age-life depreciation: Depreciation = (Effective Age / Total Economic Life) * Cost New. The result is the dollar amount of value already consumed.
Why This Is the Correct Answer
Why this is correct: For a short-lived item, depreciation is based on its effective age relative to its total economic life. The formula is: (Effective Age / Total Economic Life) * Cost New. Here: (10 years / 25 years) * $18,000 = 0.4 * $18,000 = $7,200. Why the other choices are wrong: $18,000 is the full replacement cost, not the depreciation. $10,800 represents the remaining value (60% of $18,000), not the depreciation. 'Nothing, since the roof does not leak yet' confuses physical failure with accrued depreciation; value is lost as the item ages, not just when it breaks. Exam tip: For age-life depreciation: Depreciation = (Effective Age / Total Economic Life) * Cost New. The result is the dollar amount of value already consumed.
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