During the first month of its current fiscal year, Green Co. incurred repair cos
ID: 2339994 • Letter: D
Question
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 $169,000 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.
b. Assume that Green Co.'s total assets at the end of the prior year and at the end of the current year were $946,000 and $1,017,000, 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.)
c. Indicate the effect on ROI of subsequent years if the error is not corrected.
ROI will be too low. ROI will be too high. ROI will remains the same.Explanation / Answer
Computation of Operating income that should be reported Calculate depreciation expenses for current year Particulars Amount To be depreciated (Repair cost capitalized in error) (a) 19000 Remaining life (b) 4 years Depreciation expenses in current year (a)/(b) 4750 Calculation of corrected operating income Particulars Amount operating income originally reported 169000 increase in repair expenses -19000 Decrease in depreciation expenses 4750 Corrected operating income 154750 Calculate ROI for the current year using original Data particulars amount Operating income (a) 169000 Average total assets (946000+1017000/2) (b) 981500 ROI = (a)/(b) 17.2% calculate corrected year end assets Particulars amount Year end assets originally reprted 1017000 less: net book value of mistakenly cost 19000 less : accumulated depreciation 4750 14250 Corrected year end assets 1002750 Calculate ROI for the current year using corrected date Particulars amount Operating income 154750 average total assets (946000+1002750)/2 974375 ROI = operating income/ average total assets 15.8% The depreciation expenses will be high in the subsequent years therefore the net income will be low and average assets will be high therefore ROI will be low
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