Question
In: Accounting
Depreciation and Rate of Return Burrell Company purchased a machine for $19000 on January 2, 2016....
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****
Solutions
Expert Solution
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 |
ekkarill92 answered 1 year agoRelated Solutions
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