Question

LT Assets (10 points) Savad During the first month of its current fiscal year, Green Co. incurred repair costs of $19,000 on a machine that had 4 years of remaining depreciable life. The repair cost was inappropriately capitalized Green Co. reported operating income of $152,000 for the current year. Required: o. 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 5930,000 and 51,025,000 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. 32.18) ROI Original data Corrected data c. Indicate the effect on ROI of subsequent years if the error is not corrected O ROI will be too low O ROI will be too high OROI will remains the same < Prev 5 of 12 Next >

Answer 1

a.
Calculate operating income if depreciation on repair was not capitalized
Depreciation expense	19000/4
Depreciation expense	$4,750
Operating income	152000+4750
Operating income	$156,750
b.
ROI based on original data	Operating income/Average investment
ROI based on original data	152000/((930000+1025000)/2)
ROI based on original data	152000/977500
ROI based on original data	15.55%
Total assets for current year	1025000-(19000-4750)
Total assets for current year	$1,010,750
ROI based on corrected data	156750/((930000+1010750)/2)
ROI based on corrected data	156750/970375
ROI based on corrected data	16.15%
c.
If error is not corrected then ROI would be too low