Which three methods of estimating accrued depreciation are discussed in appraisal practice?
Correct Answer
A) Age-life, sales data (market) and breakdown
Accrued depreciation can be estimated by the straight-line or age-life method, the sales data or market method, and the breakdown method. The other lists are accounting concepts, sales comparison techniques or income methods.
Why This Is the Correct Answer
Option A is correct because accrued depreciation is estimated by the straight-line or age-life method, the sales data or market method, and the breakdown method. Each measures the difference between cost new and the contribution of the improvements. Together they form the standard set of depreciation methods.
Why the Other Options Are Wrong
Option B: Book value, tax basis and replacement reserve
Option B lists book value, tax basis and replacement reserve. Book value and tax basis are accounting concepts, and a replacement reserve is an income approach expense item, so none of these is an appraisal depreciation method.
Option C: Paired sales, regression and bracketing
Option C lists paired sales, regression and bracketing. These are sales comparison techniques for deriving and testing adjustments, not the three methods of estimating accrued depreciation.
Option D: Direct capitalization, yield capitalization and GRM
Option D lists direct capitalization, yield capitalization and GRM. These are income approach methods for converting income to value, not depreciation methods.
Age, Market, Breakdown
Remember the three depreciation methods as age-life, market extraction and breakdown, matching the order they are usually taught.
How to use: Use this list to pick the depreciation methods out from accounting, sales comparison and income terms.
Exam Tip
Sort each option list by which approach or field it belongs to. Only the age-life, market and breakdown methods measure accrued depreciation.
Common Mistakes to Avoid
- -Confusing accounting depreciation with appraisal depreciation
- -Listing sales comparison adjustment techniques as depreciation methods
- -Mixing income approach methods into the cost approach
Concept Deep Dive
Analysis
This question tests recall of the methods used to estimate accrued depreciation in the cost approach. The three methods are the age-life (straight-line) method, the sales data (market extraction) method and the breakdown method. The other lists mix accounting, sales comparison and income terms.
Background Knowledge
The age-life method uses effective age divided by economic life. The market extraction method derives depreciation from sales of comparable improved properties by subtracting site value from price and comparing with cost new. The breakdown method estimates each type of depreciation separately and adds them together.
Real-World Application
An appraiser estimating depreciation for an older house first uses the age-life method, then checks the result by extracting depreciation from recent sales of similar homes. For a complex property, the appraiser may also use the breakdown method to separate physical, functional and external items.
More Cost Approach Questions
Why can equivalent-utility replacement cost be useful for an obsolete improvement?
An appraiser estimates the current replacement cost new of the improvements at $890,000, accrued depreciation from all causes at $170,000, and land value at $325,000. All necessary cost components and depreciation are included in those amounts. What is the indicated property value?
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What best supports a claimed loss from a bathroom-layout deficiency?
Improvement cost new is $1,850,000. Separately supported improvement depreciation deductions of $310,000, $620,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
Which scenario most strongly supports giving the cost approach substantial weight?
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An external influence causes an annual net income loss of $9,600. The capitalization rate for the loss is 8%, and no other economic factors change. What is the indicated loss in value of the whole property, before allocation between site and improvements?
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