In the straight-line (non-interest bearing) method of estimating reserves, the appraiser assumes that the owner will set aside a percentage the cost of the short-lived item annually so that there will be sufficient cash to replace it when it reaches the end of its useful live,
Example: A roof lasts 15 years and cost $15,000. The owner will need to set aside $1,000 per year to replace the roof. The reserve is a non-cash expense but very real and should be part of the reconstructed operating statement.
Exercise: You are appraising an apartment complex. You have observed the following short-lived items and have estimated their useful life. What should the reserve account reflect in the reconstructed operating statement using the straight method of estimating reserves?
Use the table below to calculate your answers.