Question
In: Accounting
Burrell Company purchased a machine for $49000 on January 2, 2016. The machine has an estimated...
Burrell Company purchased a machine for $49000 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 $24500 each year. The tax rate is 25%.
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?
Solutions
Expert Solution
| Answer 1 | ||||||
| Straight line depreciation per year = (Cost - residual value) / estimated service life = ($49000 - $0) / 5 years = $9800 | ||||||
| Net Income per year | ||||||
| Income before depreciation and tax | $24,500.00 | |||||
| Less : Depreciation | $9,800.00 | |||||
| Profit before tax | $14,700.00 | |||||
| Less : Tax @ 25% | $3,675.00 | |||||
| Net Income per year | $11,025.00 | |||||
| Calculation of average net asset value | ||||||
| Year | Book value asset at the beginning | Depreciation | Book value asset at the end | Average asset value | ||
| A | B | C | D | (B+D)/2 | ||
| 2016 | $49,000.00 | $9,800.00 | $39,200.00 | $44,100.00 | ||
| 2017 | $39,200.00 | $9,800.00 | $29,400.00 | $34,300.00 | ||
| 2018 | $29,400.00 | $9,800.00 | $19,600.00 | $24,500.00 | ||
| 2019 | $19,600.00 | $9,800.00 | $9,800.00 | $14,700.00 | ||
| 2020 | $9,800.00 | $9,800.00 | $0.00 | $4,900.00 | ||
| Calculation of rate of return earned by the company each year | ||||||
| Year | Net Income | Average asset value | Rate of return | |||
| A | B | C | (B/C)*100 | |||
| 2016 | $11,025.00 | $44,100.00 | 25.00% | |||
| 2017 | $11,025.00 | $34,300.00 | 32.14% | |||
| 2018 | $11,025.00 | $24,500.00 | 45.00% | |||
| 2019 | $11,025.00 | $14,700.00 | 75.00% | |||
| 2020 | $11,025.00 | $4,900.00 | 225.00% | |||
| Answer 2 | ||||||
| Depreciation for a period under double declining method = 2 x Straight line depreciation percent x book value at beginning of period | ||||||
| Straight line depreciation percent = (Depreciation per year / Depreciable value)*100 = ($9800 / $49000)*100 = 20% | ||||||
| Calculation of depreciation under DDB method and average asset value for each year | ||||||
| Year | Depreciation rate under DDB (2*20%) | Book value of asset at the beginning | Depreciation | Book value of asset at the end | Average asset value | |
| A | B | C | D = C * B | E | (C+E)/2 | |
| 2016 | 40.00% | $49,000.00 | $19,600.00 | $29,400.00 | $39,200.00 | |
| 2017 | 40.00% | $29,400.00 | $11,760.00 | $17,640.00 | $23,520.00 | |
| 2018 | 40.00% | $17,640.00 | $7,056.00 | $10,584.00 | $14,112.00 | |
| 2019 | 40.00% | $10,584.00 | $4,233.60 | $6,350.40 | $8,467.20 | |
| 2020 | 40.00% | $6,350.40 | $2,540.16 | $3,810.24 | $5,080.32 | |
| Calculation of rate of return earned by the company each year | ||||||
| Year | Net Income | Average asset value | Rate of return | |||
| A | B | C | (B/C)*100 | |||
| 2016 | $11,025.00 | $39,200.00 | 28.13% | |||
| 2017 | $11,025.00 | $23,520.00 | 46.88% | |||
| 2018 | $11,025.00 | $14,112.00 | 78.13% | |||
| 2019 | $11,025.00 | $8,467.20 | 130.21% | |||
| 2020 | $11,025.00 | $5,080.32 | 217.01% | |||
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