Modified Economic Age/Life Method

The Modified Economic Age/Life Method of estimating depreciation is used when a building has a significant amount of curable physical depreciation and/or curable functional obsolescence.

•	Curable depreciation and/or obsolescence is treated as if it is 100% depreciated

•	Incurable components are depreciated by the age/life method

The formula for estimating depreciation by the Modified Economic Age/Life Method is:

•	Incurable Depreciation = (Cost New – Curable Depreciation) x (Effective age)/(Total Economic Life)

•	Accrued depreciation = Incurable Depreciation + Curable Depreciation

Steps in the Modified Age/Life Method

Amount

Explanation

1.	Estimate the replacement cost new of the improvements.

$300,000

Replacement cost

2.	Subtract the cost to cure all items of curable physical and functional depreciation.

$60,000

Curable physical and functional obsolescence

3.	Calculate the replacement cost new of incurable components.

$240,000

$300,000 - $60,000

4.	Estimate the effective age of the house assuming curable depreciation has been corrected.

15 yrs

Effective age

5.	Estimate the remaining economic life of the house assuming curable depreciation has been corrected.

45 yrs

Remaining economic life

6.	Calculate the total economic life by adding the effective age to the remaining economic age.

60 yrs

15 yrs + 45 yrs = 60 yrs

7.	Estimate the percentage depreciation attributable to incurable components by dividing the effective age by the total economic life.

25%

15 yrs ÷ 60 yrs = 25%

8.	Depreciation of incurable components is estimated by multiplying the depreciation rate of the incurable components by the estimated total cost new of the incurable components.

$80,000

$240,000 x 25% = $80,000

9.	The total accrued depreciation by the modified age-life method is estimated by adding the estimated cost to cure the curable items (from line 2) to the depreciation estimate for the incurable components (from line 8).

$140,000

Total depreciation

$60,000 + $80,000 = $140,000

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