Cost new $400,000; curable items $12,000; ratio for the remaining components 20%. Modified age-life depreciation totals:
Correct Answer
C) $89,600 — curables plus 20% of the cured remainder
Why this is correct: The correct sequence is to first deduct curable items ($12,000) from cost new ($400,000), then apply the depreciation ratio (20%) to the remaining cost basis ($388,000), and finally add back the curable cost. $12,000 + (0.20 × $388,000) = $12,000 + $77,600 = $89,600. Why the other choices are wrong: "$92,000, applying both of the steps to the full cost" incorrectly applies 20% to $400,000 ($80,000) and adds $12,000, double-counting. "$80,000 on the uncured basis" ignores the curable items entirely. "$77,600 after netting the cure" forgets to add back the curable cost after the depreciation calculation. Exam tip: In modified age-life, subtract curable costs FIRST before applying the depreciation ratio to the remaining basis.
Why This Is the Correct Answer
Eighty-nine thousand six hundred, being the curables plus twenty percent of the cured remainder, follows the method exactly and is arithmetically verifiable. The logic behind the sequence is worth carrying into practice: an item that a buyer would repair immediately is fully depreciated at the cost of that repair, so subjecting it to a percentage ratio would either understate it, if the ratio is below one hundred percent, or double count it if it is also charged the full cure. Removing it from the base before applying the ratio keeps each dollar of depreciation counted once. In a full breakdown analysis the same discipline continues, with curable physical deterioration deducted first and the remaining long-lived and short-lived components treated separately.
Why the Other Options Are Wrong
Option A: $92,000, applying both of the steps to the full cost
Ninety-two thousand comes from applying the twenty percent ratio to the entire four hundred thousand, which yields eighty thousand, and then adding the twelve thousand of curables on top. That charges the curable items twice, once inside the ratio applied to the full base and once as the cure. It is the most common wrong answer precisely because it feels like adding both pieces of information.
Option B: $80,000 on the uncured basis
Eighty thousand is twenty percent of the full cost new with the curable items never accounted for at all. It treats the twelve thousand as though it were not depreciation, when in fact deferred maintenance is depreciation the market charges for directly. Ignoring a given figure in a computation stem is almost always wrong.
Option D: $77,600 after netting the cure
Seventy-seven thousand six hundred is the correct middle step, twenty percent of the three hundred eighty-eight thousand remainder, with the final addition left out. The candidate who lands here has understood the sequence and stopped one step early. Reading the question through to total depreciation rather than to the ratio's product is what separates this from the right answer.
Cure, Ratio, Add Back
Three steps in one order: subtract the cure, apply the ratio to what is left, then add the cure back into total depreciation. Miss the subtraction and you double count; miss the add back and you stop short. Say the three words before you touch the calculator.
How to use: On any modified age-life computation, write the three steps down before computing. Check your answer against the distractors, since the exam builds them from the two common sequence errors and the stopping-short error. If your figure equals the ratio times the full cost new plus the cure, you have double counted.
Exam Tip
Subtract curables before applying the ratio, then add them back. Total depreciation includes the cure.
Common Mistakes to Avoid
- -Applying the age-life ratio to full cost new and then adding the cure, which double counts the curable items
- -Stopping at the ratio's product without adding the cure back into total depreciation
- -Treating deferred maintenance as something other than depreciation and leaving it out entirely
Concept Deep Dive
Analysis
This item tests the sequence in the modified age-life method, which is where most candidates lose the points rather than in the arithmetic. Straight age-life applies a single ratio, effective age divided by total economic life, to the full cost new, which quietly assumes that the curable items deteriorate at the same rate as everything else. The modified version corrects that by handling curable items separately: their cost to cure is removed from the cost new first, the age-life ratio is applied only to the remaining, non-curable cost, and the curable cost is then added back into total depreciation because it is depreciation too. Running the numbers in the stem, the cost new of four hundred thousand less twelve thousand of curable items leaves a remaining basis of three hundred eighty-eight thousand, twenty percent of which is seventy-seven thousand six hundred, and adding the twelve thousand of curables gives eighty-nine thousand six hundred. Every wrong answer in this item corresponds to skipping or misplacing one of those three steps.
Background Knowledge
You need to know straight age-life depreciation, effective age divided by total economic life applied to cost new, and how the modified version differs by segregating curable items. You should know that curable physical deterioration is measured at cost to cure and that the remaining basis is what the ratio applies to. You also need the surrounding cost approach framework: replacement or reproduction cost new, deduction of accrued depreciation from all causes, physical, functional, and external, and addition of land value and site improvements.
Real-World Application
Appraising a twenty-five-year-old office building with a replacement cost new of four hundred thousand, the appraiser identifies twelve thousand in deferred maintenance a buyer would address at once. She removes that from the base, applies the twenty percent age-life ratio supported by effective age and total economic life to the remaining three hundred eighty-eight thousand, and reports total accrued depreciation of eighty-nine thousand six hundred, documenting the effective age analysis and the repair estimates in her workfile.
More Cost Approach Questions
In a cost approach for a proposed building, the appropriate cost basis is generally:
A warehouse cost $210,000 to build when the cost index stood at 105. The index is now 210. Its indicated current cost is:
The age-life method expresses depreciation as:
Market extraction of depreciation is limited by the fact that it:
Functional obsolescence caused by a deficiency is measured as curable when:
Curable physical deterioration is measured at cost to cure because:
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A house has three bedrooms sharing one bathroom, and adding a second bath is economically justified. This is:
Direct costs in a construction budget include:
An appraiser writes that a 40-year-old house has an effective age of 10 but describes original wiring, original kitchen and a 25-year-old roof. The report's problem is:
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