Question

Depreciation and Rate of Return Burrell Company purchased a machine for $58,000 on January 2, 2019. The machine has an estimated service life of 5 years and a zero estimated residual value. The asset earns income before depreciation and income taxes of $29,000 each year. The tax rate is 20%. 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. Straight-line method. If required, round to one decimal place. 2019 27 x 2020 34 x % 2021 48 % 2022 80 % 2023 240 Double-declining-balance depreciation method. Round to two decimal places. Round your intermediate dollar value calculations to the nearest whole number. 2019 2020 2021 10 % 43 99 x % 191 x % 346 x 2022 2023

Answer 1

If straight line method is used (58,000/5) Earning before depreciation and taxes Less: Depreciation (Cost/Life of asset) Earnings before taxes Less: tax @ of 20% Earnings after taxes Year 1 Year 2 Year 3 $ 29,000 $ 29,000 $ 29,000 $ (11,600)| (11,600)| (11,600)| 17,400 17,400 17,400 (3,480 (3,480) (3,480) 13,920 13,920 13,920 Year 4 Year 5 29,000 $ 29,000 (11,600)| (11,600) 17,400 17,400 (3,480) (3,480) 13,920 13,920 (A) 11,600 (11,600) Value of asset (Beginning) Less: Depreciation Value of asset (Endinng) Average Net asset = (Beg + End) / 2 58,000 (11,600) 46,400 52,200 46,400 (11,600)| 34,800 40,600 34,800 (11,600)| 23,200 29,000 2 3,200 (11,600)| 11,600 17,400 (B) 5,800 Rate of return earned Earnings afte tax Average net assets (A) X 100 26.67 34.29 48.00 80.00 240.00 If Double declining balance method is used Rate of depreciation = Depreciation as per straight line method / Cost of asset * 100 will be doubled by multiplying with 2 = 11,600 / 58,000 X 100 X 2 = 40% = 40% $ $ $ Earning before depreciation and taxes Less: Depreciation (Cost/Life of asset) Earnings before taxes Less: tax @ of 20% Earnings after taxes Year 1 29,000 (23,200 5,800 (1,160) 4,640 Year 2 29,000 (13,920) 15,080 (3,016) 12,064 Year 3 Year 4 29,000$ 29,000 $ (8,352) (5,011) 20,648 23,989 (4,130) (4,798) 16,518 19,191 Year 5 29,000 (3,007) 25,993 (5,199) 20,795 101 (A) i) =i) X 40% Value of asset (Beginning) Less: Depreciation Value of asset (Endinng) Average Net asset = (Beg + End) / 2 58,000 (23,200)| 34,800 46,400 34,800 (13,920) 20,880 27,840 20,880 (8,352) 12,528 16,704 12,528 (5,011) 7,517 10,022 7,517 (3,007) 4,510 ,013 (B) 6 Rate of return earned Earnings afte tax Average net assets A X 100 10.00 43.33 98.89 191.48 345.80