An appraiser measures depreciation in two parts that do not overlap: a separate $12,000 curable allowance, and 20% of the cost new remaining after that allowance is removed. Cost new is $400,000. What is the total depreciation?
Correct Answer
C) $89,600
12000+(400000−12000)×0.20 = 89600. Common errors: leaving out the separate $12,000 curable allowance gives $80,000; applying the 20% to cost new before removing the allowance gives $92,000; reporting only the percentage component gives $77,600.
Why This Is the Correct Answer
Option C is correct because the remaining base is $400,000 - $12,000 = $388,000, 20% of that is $77,600, and adding the $12,000 curable allowance gives $89,600 total depreciation. This follows the stated two-part measure and avoids applying the percentage to the curable amount.
Why the Other Options Are Wrong
Option A: $77,600
Option A, $77,600, reports only the percentage component: ($400,000 - $12,000) x 0.20 = $77,600. The separate $12,000 curable allowance must be added, giving $89,600.
Option B: $80,000
Option B, $80,000, leaves out the curable allowance and applies 20% to full cost new: $400,000 x 0.20 = $80,000. The two-part measure calls for $12,000 + ($388,000 x 0.20) = $89,600.
Option D: $92,000
Option D, $92,000, applies the 20% to cost new before removing the allowance: $12,000 + $400,000 x 0.20 = $92,000. This depreciates the curable amount twice; the correct base is $388,000, giving $89,600.
Remove, apply, add back
Remove the curable amount from cost, apply the percentage to what is left, then add the curable amount back into total depreciation.
How to use: Use this three-step pattern for any total-depreciation question with a separate curable allowance.
Exam Tip
Look for words such as 'remaining after' that tell you which base the percentage applies to.
Common Mistakes to Avoid
- -Applying the percentage to full cost new when it belongs on the remaining base
- -Reporting only one component of total depreciation
- -Forgetting the separate curable allowance
Concept Deep Dive
Analysis
This question tests a two-part depreciation model: a separate curable allowance plus a percentage applied to the cost remaining after that allowance. The order matters because the percentage base is reduced by the curable amount first. The total is the sum of both parts.
Background Knowledge
In the breakdown approach, total depreciation is found by adding individual estimates of depreciation. When a curable item is measured separately, the remaining depreciation percentage should be applied to the cost base after that item is removed to avoid double counting.
Real-World Application
An appraiser measures a $12,000 cost to cure for a worn roof covering, then applies an age-life percentage to the rest of the building cost. The total depreciation reported is the roof amount plus the percentage of the remaining cost.
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