chapter 17 depreciation Flashcards
(5 cards)
A three-storey, 45 year old, Tudor style home has the entrance way located so that one enters through the dining room. As well, the ceiling height on the main floor is only six feet, which was an acceptable height when the home was first built. These would be examples of:
- functional curable depreciation.
- functional incurable depreciation.
- physical curable depreciation.
- physical incurable depreciation.
Correct Answer: 2
This question requires you to distinguish between the various types of depreciation. In this case, the Tudor house has very low ceilings and a poor main floor plan with the entrance way located in the dining room. These would both be examples of functional incurable depreciation.
The deteriorating roof tiles of a ranch style home that was built in the late 1990s would be classified as:
- incurable physical depreciation.
- incurable functional depreciation.
- curable physical depreciation.
- curable functional depreciation.
Correct Answer: 3
Incurable depreciation refers to depreciation that is not economically worthwhile to correct. Deteriorating rooftiles can be corrected without completely rebuilding and therefore, it is considered curable depreciation. Functional depreciation refers to items of an outdated design which cause a decline in value. Physical depreciation represents the loss in value due to physical wear and tear. Deteriorating rooftiles would be classified as curable physical depreciation.
Atlas Appraisal Services Ltd is appraising a warehouse using the Cost Approach. The warehouse has an estimated economic life of 25 years and a salvage value of $5,000 at the end of that time. The current replacement cost is $1,500,000. If the effective age of the warehouse is 5 years at the time of the appraisal, what is the estimate for incurable physical depreciation using the straight-line method of depreciation?
- $60,000
- $299,000
- $59,800
- $300,000
Correct Answer: 2
The annual depreciation must be calculated using the following formula:
If the effective age of the building is 5 years at the time of the appraisal, the estimate for incurable physical depreciation is $299,000 (5 H $59,800). Therefore, option (2) is correct.
Eric Poolman has been asked to appraise a duplex in a subdivision in Calgary. The subject is on a 60 foot × 115 foot lot. Eric will be using the cost approach of appraisal and has obtained the following information:
The current replacement cost for a new building of this type is approximately $315 per square foot. The original cost of the duplex was $165 per square foot.
The balcony at the back of the house is deteriorating and is sorely in need of replacement. The cost of replacing the balcony is estimated to be $20,500.
The kitchen design is completely outdated and the two kitchens will need to be replaced at a total cost of $49,000.
Four empty lots in the neighbourhood recently sold for the following amounts:
Lot A: 60 feet × 112 feet Selling Price: $382,000
Lot B: 60 feet × 118 feet Selling Price: $396,000
Lot C: 80 feet × 150 feet Selling Price: $421,000
Lot D: 60 feet × 117 feet Selling Price: $392,000
The current use represents the highest and best use of this site.
The duplex measures 4,400 square feet
The estimate for physical curable depreciation and functional curable depreciation is:
- $0 and $49,000 respectively.
- $49,000 and $0 respectively.
- $20,500 and $49,000 respectively.
- $49,000 and $20,500 respectively.
Correct Answer: 3
Curable physical depreciation consists of physical wear and tear that can be corrected economically such as the balcony; the replacement cost is $20,500. Functional curable depreciation consists of an outdated design that can be corrected economically such as the outdated kitchens; the replacement cost is $49,000.
Subject Property
Comparable A
Comparable B
Comparable C
Number of Bedrooms
4
4
?
?
Number of Bathrooms
4
3
?
?
Air Conditioning
Yes
No
?
?
Deck
No
Yes
?
?
Living Room (square feet)
320
280
?
?
Sale Price
?
$1,252,000
$1,165,000
$1,243,000
Adjustments
Bedrooms
?
0
0
Bathrooms
?
+6,620
0
Air Conditioning
?
0
+3,250
Deck
?
?
–5,600
Living Area
?
0
–15,000
The market value of:
1 bedroom is $7,850;
1 bathroom is $6,620;
Air conditioning is $3,250;
A deck is $5,600; and
Above the 280 square feet benchmark, each square feet of living area is worth $375.
An appraiser has determined the market value of a property to be $820,000 using the cost approach. In this estimate, the appraiser has included depreciation of $45,000, and has appraised the value of the lot to be $430,000. How much has the appraiser estimated as the cost new of improvements?
- $430,000
- $435,000
- $345,000
- $340,000
Correct Answer: 2
Improvements (cost new) − depreciation + site value = market value
Improvements (cost new) = market value - site value + depreciation
$435,000 = $820,000 − $430,000 + 45,000
