During the first month of the current fiscal year, Elco Motors acquired new shop equipment and...

During the first month of the current fiscal year, Elco Motors acquired new shop equipment and incurred $400,000 of installation, interest and other associated costs that should have been capitalized, but were expensed. Elco earned net operating income of $4,500,000 on average total assets of $36,000,000 in FY2016. Assume the total cost of the machinery will be depreciated over 10 years using straight line depreciation.

A. Calculate Return on Investment for ELCO for FY2016 after adjustment for the posting correction.

B. Calculate the ROI assuming the equipment depreciation is double declining balance using $100,000 as the salvage value.

C. Calculate the ROI for ELCO assuming that the $400,000 had been capitalized and depreciated over the life of the equipment using the straight-line depreciation method.

Solutions

Expert Solution

A	ROI after adjustment for the posting correction

	Average total assets	$36,000,000
	Total assets	$72,000,000
	Add: New shop equipment	$400,000
	Total assets after adjustment	$72,400,000
	Average total assets after adjustment	$36,200,000

	Net operating income	$4,500,000
	Average total assets after adjustment	$36,200,000
	ROI (4500000/36200000)	12.43%

B	ROI assuming the depreciation is double declining balance using $100000 as the salvage value

	Cost of equipment	$400,000
	Salvage value	$100,000
	Depreciable cost	$300,000
	Straight line rate (1/10)	10%
	Double declining rate (10% x 2)	20%
	Depreciation for 2018 (400000 x 20%)	$80,000

	Net operating income	$4,500,000
	Less: Depreciation	$80,000
	Adjusted net operating income	$4,420,000

	Net operating income	$4,420,000
	Average total assets after adjustment	$36,200,000
	ROI (4500000/36200000)	12.21%

c	ROI assuming the depreciation is straight line method

	Cost of equipment	$400,000
	Useful life	10

	Straight line depreciation	$40,000

	Net operating income	$4,500,000
	Less: Depreciation	$40,000
	Adjusted net operating income	$4,460,000

	Net operating income	$4,460,000
	Average total assets after adjustment	$36,200,000
	ROI (4500000/36200000)	12.32%

ekkarill92 answered 1 year ago

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