Campus Video Games (CVG) was started on January 1, 2010, when it acquired $62,500 cash from the

Question:

Campus Video Games (CVG) was started on January 1, 2010, when it acquired $62,500 cash from the issue of common stock. The company immediately purchased video games that cost $62,500 cash. The games had an estimated salvage value of $7,500 and an expected useful life of five years. CVG used the games during 2010 to produce $25,000 of cash revenue. Assume that these were the only events affecting CVG during 2010.

Required

a. Compute the return on assets ratio as of December 31, 2010, assuming CVG uses the straight-line depreciation method.

b. Recompute the ratio assuming CVG uses the double-declining-balance method.

c. Which depreciation method makes it appear that CVG is utilizing its assets more effectively?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...