The Burrell Company purchased a machine for $20,000 on January 2, 2007. The machine has an estimated
Question:
The Burrell Company purchased a machine for $20,000 on January 2, 2007. The machine has an estimated service life of five years and a zero estimated residual value. The asset earns income before depreciation and income taxes of $10,000 each year. The tax rate is 30%.
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.
Step by Step Answer:
Straightline method Depreciation Income before depreciation 10000 Less Depreciation ex...View the full answer
Intermediate Accounting
ISBN: 978-0324300987
10th Edition
Authors: Loren A Nikolai, D. Bazley and Jefferson P. Jones
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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