Question

How much would a homeowner receive with actual​ cash-value coverage and replacement cost coverage for a​ three-year old sofa destroyed by a​ fire? The sofa would cost $1,060 to replace​ today, whereas it cost $833 three years​ ago, and it has an estimated life of six years.

Answer 1

The amount that the owner would receive for the sofa with actual​ cash-value coverage

The amount that the owner would receive for the sofa with actual cash-value coverage = The cost to replace the sofa – Accumulated Depreciation at the end of year 3

= $1,060 – [($1,060 / 6 Years) x 3 Years]

= $1,060 - $530

= $530

The amount that the owner would receive for the sofa with replacement​ coverage

The amount that the owner would receive for the sofa with replacement coverage would be the actual cost for replacing the old sofa = $1,060