Question

Depreciation and Rate of Return

Burrell Company purchased a machine for $19000 on January 2, 2016. The machine has an estimated service life of 5 years and a zero estimated residual value. The asset earns income before depreciation and income taxes of $9500 each year. The tax rate is 35%.

Required:

Compute the rate of return earned (on the average net asset value) by the company each year of the asset's life under the straight-line and the double-declining-balance depreciation methods. Assume that the machine is the company's only asset.

Straight-line method. Do not round intermediate calculations. Round final answer to two decimal places.

2016: ____%

2017: ____%

2018: ____%

2019: ____%

2020: ____%

Double-declining-balance depreciation method. Do not round intermediate calculations. Round final answer to two decimal places.

2016: ____%

2017: ____%

2018: ____%

2019: ____%

2020: ____%

***Please show all work and calculations****

Answer 1

1) Straight line depreciation = 19000 / 5 = $3800

Straight Line Method
Year	Depreciation	Carrying amount	EBIT	Tax@35%	EAT	ROR
2016	$3,800	$15,200	$5,700	$1,995	$3,705	48.75%
2017	$3,800	$11,400	$5,700	$1,995	$3,705	48.75%
2018	$3,800	$7,600	$5,700	$1,995	$3,705	48.75%
2019	$3,800	$3,800	$5,700	$1,995	$3,705	48.75%
2020	$3,800	$0	$5,700	$1,995	$3,705	48.75%
	Average	$7,600

2) Double declining method

Double declining balance method
Year	Depreciation	Carrying amount	EBIT	Tax@35%	EAT	ROR
2016	$7,600	$11,400	$1,900	$665	$1,235	23.49%
2017	$4,560	$6,840	$4,940	$1,729	$3,211	61.08%
2018	$2,736	$4,104	$6,764	$2,367	$4,397	83.64%
2019	$1,642	$2,462	$7,858	$2,750	$5,108	97.17%
2020	$985	$1,477	$8,515	$2,980	$5,535	105.29%
	Average	$5,257

Workings for Depreciation

Year	Beginning book value	Depreciation	Ending book value
2016	$19,000	$7,600	$11,400
2017	$11,400	$4,560	$6,840
2018	$6,840	$2,736	$4,104
2019	$4,104	$1,642	$2,462
2020	$2,462	$985	$1,477