Prepare a table similar to Exhibit, which focuses on residual income. Use a 10 percent rate to
Question:
Prepare a table similar to Exhibit, which focuses on residual income. Use a 10 percent rate to compute the imputed interest charge. The table should show the residual income on the investment during each year in its five-year life. Assume the same income before depreciation and the same depreciation schedule as shown in Exhibit.
$500,000 Acquisition cost of equipment Useful life 5 years Salvage value at end of useful life Annual straight-line depreciation.. Annual income generated by asset (before deducting depreciation). $100,000 $150,000 ROI Average ROI Based on Income Average Gross Based on Income Annual Depreciation Gross Book before Net of Net Book Net Book Book Valuet Year Depreciation Depreciation Value* Value Value $150,000 $100,000 $50,000 $450,000 $500,000 11.1% 10% 150,000 100,000 50,000 350,000 14.3 500,000 10 150,000 100,000 50,000 250,000 20.0 500,000 10 150,000 100,000 50,000 150,000 33.3 500,000 10 50,000 150,000 100,000 50,000 100.0 500,000 10 "Average net book value is the average of the beginning and ending balances for the year in net book value. In year 1, for example, the average net book value is $500,000 + $400,000 2 IROI rounded to nearest tenth of 1 percent.
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Related Video
In accounting terms, depreciation is defined as the reduction of the recorded cost of a fixed asset in a systematic manner until the value of the asset becomes zero or negligible. An example of fixed assets are buildings, furniture, office equipment, machinery, etc. The land is the only exception that cannot be depreciated as the value of land appreciates with time. Depreciation allows a portion of the cost of a fixed asset to be the revenue generated by the fixed asset. This is mandatory under the matching principle as revenues are recorded with their associated expenses in the accounting period when the asset is in use. This helps in getting a complete picture of the revenue
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