Question

In: Accounting

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 2 years ago
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