Improvement cost new is $595,000. Separately supported improvement depreciation deductions of $48,000, $27,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $155,000, already reflecting any site losses. What total indicated value results?
Correct Answer
B) $675,000
595000−(48000+27000)+155000 = 675000. Common errors: leaving out the site value gives $520,000; leaving out the $27,000 item gives $702,000; not deducting any depreciation gives $750,000.
Why This Is the Correct Answer
Option B is correct because total depreciation is $48,000 + $27,000 = $75,000. Cost new less depreciation is $595,000 − $75,000 = $520,000, and adding the $155,000 site gives $675,000. Both items are nonoverlapping and not already excluded from cost new, so both are deducted.
Why the Other Options Are Wrong
Option A: $520,000
Option A, $520,000, leaves out the site value: $595,000 − ($48,000 + $27,000) = $520,000. Adding the $155,000 site gives the correct total of $675,000.
Option C: $702,000
Option C, $702,000, leaves out the $27,000 item: $595,000 − $48,000 + $155,000 = $702,000. Both nonoverlapping deductions apply, giving $595,000 − $75,000 + $155,000 = $675,000.
Option D: $750,000
Option D, $750,000, deducts no depreciation at all: $595,000 + $155,000 = $750,000. Subtracting the $75,000 total depreciation gives $675,000.
Sum the losses first
Add each separate, nonoverlapping depreciation item into one total before subtracting. Then add the site at the end.
How to use: Use this when a cost problem lists more than one depreciation deduction.
Exam Tip
Count the deductions in the stem and confirm your calculation uses each one exactly once.
Common Mistakes to Avoid
- -Deducting only one of several depreciation items
- -Forgetting to add site value
- -Subtracting site value instead of adding it
Concept Deep Dive
Analysis
This question tests a cost approach summation with two separately supported depreciation items. Because the items are nonoverlapping, they are added to get total depreciation, which is subtracted from cost new before adding site value. The wrong answers skip the site, skip one item or skip depreciation entirely.
Background Knowledge
In the breakdown approach, total depreciation is the sum of the individual estimates of depreciation. The cost approach indication is cost new less total depreciation plus site value. Items must be nonoverlapping so the same loss is not deducted twice.
Real-World Application
An appraiser estimates physical deterioration of a worn roof and a functional loss from a dated kitchen, confirming they do not overlap. Both are deducted from replacement cost new, and land value from site sales is added to complete the cost approach.
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Improvements have a current cost new of $600,000, an effective age of 20 years and a total economic life of 50 years. There are no other deductions and no salvage value. By the straight-line age-life method, what is the depreciated cost of the improvements?