Refer to Exhibit. Prepare a similar table of the changing ROI assuming the following accelerated depreciation schedule.
Question:
Year Depreciation
1 ........... $200,000
2 ........... 120,000
3 ........... 72,000
4 ........... 54,000
5 ........... 54,000
Total ......... $500,000
/
Required:
1. How does your table differ from the one in Exhibit? Why?
2. What are the implications of the ROI pattern in yourtable?
$500,000 5 years Acquisition cost of equipment Useful life Salvage value at end of useful life Annual straight-line depreciation Annual income generated by asset (before deducting depreciation) $100,000 $150,000 ROI Based on Net Book Valuet ROI Based on Gross Book Value 10% 10 10 10 10 Average Gross Book Value Average Net Book Year Depreciation Depreciation Depreciation Value* $450,000 350,000 250,000 150,000 50,000 Income before Income Net of Annual $150,000 150,000 150,000 150,000 150,000 $100,000 100,000 100,000 100,000 100,000 $50,000 50,000 50,000 50,000 50,000 11.1% 14.3 20.0 33.3 100.0 $500,000 500,000 500,000 500,000 500,000 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 ROI rounded to nearest tenth of 1 percent.
Step by Step Answer:
Year Income Before Depreciation Annual Depreciation Income Net of Depreciation Average Net Book Valu...View the full answer
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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