Using the straight-line method, what is the annual depreciation for a building with a cost new of $500,000 and an economic life of 50 years?
Correct Answer
D) $10,000
Why this is correct: Straight-line depreciation allocates cost evenly over the economic life. Annual depreciation = Cost New ÷ Economic Life = $500,000 ÷ 50 years = $10,000 per year. Why the other choices are wrong: "$25,000" is wrong, possibly from dividing by 20 years. "$50,000" is wrong, possibly from dividing by 10 years. "$5,000" is wrong, possibly from dividing by 100 years. Exam tip: In straight-line depreciation, annual charge is always cost divided by total economic life.
Why This Is the Correct Answer
Option B ($10,000) is correct because it properly applies the straight-line depreciation formula. The calculation is: Cost New ÷ Economic Life = Annual Depreciation, which equals $500,000 ÷ 50 years = $10,000 per year. This represents 2% annual depreciation ($10,000 ÷ $500,000 = 0.02 or 2%), which is reasonable for a building with a 50-year economic life. The straight-line method distributes the total depreciation evenly across all years of the building's useful life.
Why the Other Options Are Wrong
Option A: $25,000
$25,000 would result from dividing $500,000 by 20 years, not 50 years, representing an incorrect economic life assumption.
Option B: $50,000
$50,000 would result from dividing $500,000 by 10 years, representing a much shorter economic life than the given 50 years.
Option C: $5,000
$5,000 would result from dividing $500,000 by 100 years, doubling the actual economic life of 50 years.
The SLICE Method
SLICE = Straight Line Is Cost Evenly (divided). Remember: 'Slice the cost evenly across the years like cutting a pie into equal pieces.'
How to use: When you see straight-line depreciation, think 'SLICE' and immediately set up the division: Cost New ÷ Economic Life = Annual Depreciation. Visualize slicing the total cost into equal yearly portions.
Exam Tip
Always double-check your division by ensuring the economic life number is in the denominator - many test-takers accidentally flip the formula under pressure.
Common Mistakes to Avoid
- -Confusing economic life with physical life or remaining life
- -Flipping the formula and dividing economic life by cost new
- -Using the wrong time period (confusing 50 years with other numbers in the problem)
Concept Deep Dive
Analysis
This question tests understanding of the straight-line depreciation method, which is the most basic and commonly used approach for calculating physical deterioration in real estate appraisal. The straight-line method assumes that a building depreciates at a constant rate over its economic life, meaning equal dollar amounts of depreciation occur each year. This method is fundamental to the cost approach to value, where appraisers must estimate the depreciated value of improvements. The calculation is straightforward: divide the total cost new by the number of years of economic life to determine annual depreciation.
Background Knowledge
The straight-line method is one of several depreciation calculation methods used in real estate appraisal, particularly within the cost approach. Appraisers must understand that economic life refers to the period over which improvements contribute to property value, which may differ from physical life or accounting depreciation periods.
Real-World Application
Appraisers use straight-line depreciation when applying the cost approach to value older buildings, helping determine how much value the improvements have lost due to age and wear, which is then subtracted from the replacement cost new.
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Using the straight-line method, what is the annual depreciation for a building with a cost new of $500,000 and an economic life of 40 years?
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