The improvements have a cost new of $700,000. A $20,000 cure allowance comes off cost new first, and remaining physical depreciation of 15% applies to the cost left after the cure allowance. These deductions do not overlap. The site value is $160,000. What is the indicated value by the cost approach?
Correct Answer
B) $738,000
(700000−20000)×0.85+160000 = 738000. Common errors: leaving out the site value gives $578,000; not deducting the $20,000 cure allowance first gives $755,000; not deducting the 15% physical depreciation gives $840,000.
Why This Is the Correct Answer
Option B is correct because $700,000 − $20,000 = $680,000, and $680,000 × 0.85 = $578,000 after the 15% physical depreciation. Adding the $160,000 site value gives $738,000.
Why the Other Options Are Wrong
Option A: $578,000
Option A, $578,000, is the depreciated improvement value only ($680,000 × 0.85). It leaves out the $160,000 site value; adding it gives $738,000.
Option C: $755,000
Option C, $755,000, applies 15% to the full $700,000 without first deducting the $20,000 cure ($700,000 × 0.85 + $160,000 = $595,000 + $160,000). The stated order gives ($700,000 − $20,000) × 0.85 + $160,000 = $738,000.
Option D: $840,000
Option D, $840,000, deducts the cure but skips the 15% physical depreciation ($700,000 − $20,000 + $160,000). Applying 85% to the $680,000 remainder and adding site gives $738,000.
Cure first, then percent
Take out the dollar cure, then apply the percentage to what remains. Add land last.
How to use: Use this order whenever a problem mixes a dollar deduction with a percentage applied to a remainder.
Exam Tip
Read the stated sequence carefully; applying a percentage to the wrong base is a common designed distractor. Then confirm whether the site value belongs in the answer.
Common Mistakes to Avoid
- -Applying the percentage to full cost new instead of the remainder
- -Leaving out the site value
- -Forgetting the percentage deduction after the cure
Concept Deep Dive
Analysis
This question tests applying depreciation deductions in a specified order. The cure allowance comes off cost new first, then the 15% physical depreciation applies to the $680,000 remainder. Add the site value to reach the total.
Background Knowledge
In the breakdown method, separate depreciation items are combined, and the order of deduction matters when a percentage applies to a remaining base. Deducting a curable item first and applying the percentage to the remainder avoids charging depreciation twice on the cured portion. Site value is added after the improvement deductions.
Real-World Application
An appraiser deducts the cost to replace a failed water heater from cost new and then applies a percentage for remaining wear to the rest of the building. Doing it in this order keeps the replaced item from being depreciated twice.
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