What does a zero-residual straight-line allocation assume?
Correct Answer
D) The same dollar amount in each equal period of the life.
A stipulated straight-line model allocates a constant dollar amount per equal period, or constant percentage of the ORIGINAL depreciable base. It is not a constant percentage of the shrinking balance and does not prove actual market losses follow a line. A different pattern needs a different supported model.
Why This Is the Correct Answer
Option D is correct because a straight-line allocation with zero residual spreads the depreciable base evenly, producing a constant dollar amount per equal period, or a constant percentage of the original base. It is a modeling assumption and does not by itself prove that actual market losses follow a straight line.
Why the Other Options Are Wrong
Option A: A constant percentage of the shrinking balance as a different model.
Option A describes a constant percentage of the shrinking balance, which is a declining-balance pattern, not straight-line. Straight-line uses a constant percentage of the original depreciable base.
Option B: All of the loss occurring in the last period of the life.
Option B, all of the loss occurring in the last period, describes a lump-sum pattern at the end of the life. Straight-line spreads the loss evenly across each equal period.
Option C: A dollar loss that grows larger each year of the life.
Option C, a dollar loss that grows larger each year of the life, describes an increasing-loss pattern. Straight-line keeps the dollar loss the same in each equal period.
Straight line, same slice
On a straight line, each year cuts the same slice from the original base, so the loss per year stays level.
How to use: Use this to spot the straight-line choice among depreciation pattern options.
Exam Tip
Separate 'percentage of the original base' (straight-line) from 'percentage of the remaining balance' (declining balance).
Common Mistakes to Avoid
- -Confusing straight-line with declining-balance depreciation
- -Assuming straight-line proves actual market losses are even each year
- -Thinking straight-line loss grows larger as the building ages
Concept Deep Dive
Analysis
This question tests what the straight-line model assumes about how depreciation is spread over time. Straight-line allocates the same dollar amount in each equal period, which equals a constant percentage of the original depreciable base. Other patterns, such as declining balance or accelerating loss, are different models.
Background Knowledge
The age-life method commonly assumes straight-line depreciation, where the loss each year is the same fraction of cost new. Annualizing an extracted depreciation rate also assumes straight-line loss, so the appraiser should consider whether market evidence supports a different pattern.
Real-World Application
An appraiser extracts 30% total depreciation from a 15-year-old comparable and annualizes it at 2% per year to apply to the subject. In doing so the appraiser is assuming straight-line loss and should note that the actual market pattern may differ.
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