Question

During the first month of its current fiscal year, Green Co. incurred repair costs of $24,000 on a machine that had 3 years of remaining depreciable life. The repair cost was inappropriately capitalized. Green Co. reported operating income of $167,000 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 $939,000 and $1,022,000, 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. (e.g., 32.1)) 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.

Answer 1

Solution a:

Repair expesne should have been expenses fully.

Therefore corrected Operating income to be reported = $167000 + Decreciation on 24000 - Repair expense

= $167000 + (24000/ 3) - 24000

= $151,000

Solution b:

Average total assets = ($939000 +1022000) / 2 = $980,500

Original date ROI = $167000 / $980500 = 17.0%

Correct Average total assets = ($939000 +1022000-24000 + 24000/3) / 2 = $971,500

Correct data ROI = $151000 / $971500 = $15.5%

Solution c:

ROI will be too low.