Question

During the first month of its current fiscal year, Green Co. incurred repair costs of $16,000 on a machine that had 4 years of remaining depreciable life. The repair cost was inappropriately capitalized. Green Co. reported operating income of $164,000 for the current year.

Required:

a. Assuming that Green Co. took a full year's straight-line depreciation expense in the current year, calculate the operating income that should have been reported for the current year.

Operating Income

b. Assume that Green Co.'s total assets at the end of the prior year and at the end of the current year were $941,000 and $1,024,000, respectively. Calculate ROI (based on operating income) for the current year using the originally reported data and then using corrected data. (Round your answers to 1 decimal place.)

	ROI
Original data		%
Corrected data		%

c. Indicate the effect on ROI of subsequent years if the error is not corrected.

	ROI will be too low.
	ROI will be too high.
	ROI will remains the same.

Answer 1

Green company incurred repaired cost of $ 16000.on machine that have 4 years of remaining depreciable life.and repaired cost is inappropriately capitalized.and company reported operating income of $ 64000.

As per accounting principals the repair cost should not be capitalized in the books of accounts the same is charged to profit and loss account.

Ans to a.

Green co.

operating income $ 64000.

less:repair expenses on machine i.e inappropriately.

capitalized in to machine. $ 16000.

add back depreciation i.e $ 16000/4 years $ 4000.

* corrected operating income $ 52000.

NOTE: vale of machine is not not know to us and depreciation

is also limited to $ 16000 which is inappropriately capitalized.

Ans to b ROI

original data $ 64000/$ 1024000*100 i.e 6.25 %.

corrected data $ 52000/$ 1024000*100 i.e 5.08 %

Ans to c

ROI of subsequent year if error is not corrected is ROI will be too low.