A supported cost-approach model indicates $630,000 before a specified superadequacy loss. Analysis establishes $35,000 of noncontributing excess cost as the applicable functional-obsolescence deduction, not yet reflected in the baseline. What indication follows?
Correct Answer
A) $595,000
Under the stated supported model, deduct the specified functional loss once:$630,000−$35,000=$595,000. The loss and excluded baseline effect are supplied. This does not imply every expensive feature is superadequate, that construction expenditure always equals value, or that an already depreciated market indication should be reduced again.
Why This Is the Correct Answer
Option A is correct because the supported model indicates $630,000 before the superadequacy loss, and $630,000 - $35,000 = $595,000. The stem states the deduction is not yet reflected in the baseline, so it is subtracted once. In the breakdown method, the individual depreciation estimates are totaled and deducted from cost.
Why the Other Options Are Wrong
Option B: $630,000
Option B, $630,000, is the baseline before the functional loss; it ignores the $35,000 deduction and should be $630,000 - $35,000 = $595,000.
Option C: $665,000
Option C, $665,000, adds the $35,000 instead of deducting it ($630,000 + $35,000 = $665,000), treating noncontributing excess cost as if it added value. Superadequacy is a loss, so the indication is $630,000 - $35,000 = $595,000.
Option D: $35,000
Option D, $35,000, is the functional-obsolescence deduction itself, not the indicated value; the indication is $630,000 - $35,000 = $595,000.
Overbuilt means overcost
Superadequacy is the extra cost the market will not pay for, so subtract it once from the cost-based indication.
How to use: Use this when a question describes an overimprovement in the cost approach.
Exam Tip
Check whether the baseline already includes the depreciation before subtracting it, and remember that excess cost reduces the indication rather than raising it.
Common Mistakes to Avoid
- -Assuming construction cost equals contribution to value
- -Deducting a loss that is already reflected in the baseline
- -Adding superadequate cost to the indication instead of deducting it
Concept Deep Dive
Analysis
This question tests applying a stated functional-obsolescence deduction in the cost approach. The baseline does not yet reflect the superadequacy loss, so subtract the $35,000 once from $630,000. Reject options that ignore the deduction, add it, or report only the deduction.
Background Knowledge
Superadequacy is a form of functional obsolescence in which a component costs more than it contributes to value. In the breakdown method, total depreciation is the sum of the individual estimates of physical, functional and external depreciation, and that total is deducted from cost.
Real-World Application
A house has a heated indoor pool that cost far more than buyers in the area will pay. The appraiser measures the noncontributing excess cost and deducts it as functional obsolescence in the cost approach.
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