Annual effective gross income for the subject property is $320,000. Annual expenses are $112,000, and no other deductions apply. How much income remains after deducting those expenses?
Correct Answer
B) $208,000
320000−112000 = 208000. Common errors: adding the expense instead of deducting it gives $432,000; not deducting the expense gives $320,000; reporting the expense instead of the remaining income gives $112,000.
Why This Is the Correct Answer
Option B is correct because $320,000 − $112,000 = $208,000. Deducting the stated expense from effective gross income leaves the remaining income.
Why the Other Options Are Wrong
Option A: $112,000
Option A, $112,000, reports the expense itself rather than the income left after deducting it. The remaining income is $320,000 − $112,000 = $208,000.
Option C: $320,000
Option C, $320,000, is the effective gross income before the expense is deducted. Subtracting $112,000 gives $208,000.
Option D: $432,000
Option D, $432,000, adds the expense to income ($320,000 + $112,000) instead of deducting it. The correct result is $320,000 − $112,000 = $208,000.
Expenses subtract, not add
Expenses reduce income on the way down the operating statement; income only grows when other income is added.
How to use: Use this check to confirm the sign of each line on a reconstructed operating statement.
Exam Tip
When the stem says no other deductions apply, do not bring in other assumed expenses.
Common Mistakes to Avoid
- -Adding expenses to income
- -Reporting the expense line as the answer
- -Stopping at EGI without deducting expenses
Concept Deep Dive
Analysis
This question tests a simple deduction step in income processing: subtract the stated $112,000 annual expense from $320,000 of effective gross income. The stem limits the deduction to that one amount, so no other adjustment is made.
Background Knowledge
Net operating income is gross income less operating expenses. Effective gross income already reflects vacancy and collection loss, so deducting operating expenses from EGI moves the analysis to net income.
Real-World Application
An appraiser reconstructs a rental property's operating statement with $320,000 of EGI and $112,000 of operating expenses. The resulting $208,000 is the income carried forward to capitalization.
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