California Real Estate SalespersonProperty Valuation and Financial AnalysisMedium
An appraiser is valuing a property using the cost approach. The cost to construct the building is $350,000. It has an estimated economic life of 70 years, but due to excellent maintenance and recent upgrades, its effective age is only 10 years. What is the total accrued depreciation for the property?
- A$40,000
- B$50,000
- C$35,000
- D$300,000
Show answer & explanationAnswer & explanation
Correct answer: B. $50,000
First, calculate the annual depreciation using the total economic life: $350,000 / 70 years = $5,000 per year. Then, multiply the annual depreciation by the effective age: $5,000/year * 10 years = $50,000 total accrued depreciation. The chronological age is irrelevant if an effective age is provided.
Why the other options are wrong
- A. This is an incorrect calculation, possibly using a wrong effective age or making a math error.
- C. This would be the depreciation if the effective age was 7 years.
- D. This would be the depreciated value of the property, not the accrued depreciation.
Effective Age
The age of a property indicated by its condition and utility, rather than its chronological age.
- Can be less than, equal to, or greater than chronological age
- Used in the cost approach to calculate accrued depreciation
- Reflects the property's actual wear and tear and functional obsolescence
Memory trick: Effective Age, Not Calendar Page, Dictates Depreciation's Stage.