By which method is valuation carried out to be initial or prime cost less depreciation?
- AEstimated cost from accounts
- BInitial cost-based valuationCorrect
- CCost from detailed items
- DProfit-based valuation
Solution
Concept
In the cost method of valuation, value = initial (prime) cost of the property minus depreciation.
Formula
Value = Initial cost - Depreciation
Step-by-step solution
1. In the cost-based method, find the actual initial or prime cost of construction. 2. Find the depreciation for the age of the building. 3. Value = initial cost - depreciation. 4. This matches 'Initial cost-based valuation'. Answer is (B).
Explanation
In the cost method, we start with the original cost of the building. Then we subtract depreciation for its age and condition. The remaining amount is the present value.
Why the other options are wrong
A: Accounts only give the cost data, not the name of the valuation method. C: Detailed items are used for making an estimate, not for valuation by cost less depreciation. D: The profit method uses net income from the property, not initial cost.
Shortcut
Initial cost - depreciation = cost method.
Common mistake
Mixing up the cost method with the profit or rental method, which are based on income.
Correct answer: B) Initial cost-based valuation