Question

During the first month of its current fiscal year, Green Co. incurred repair costs of $18,000 on a machine that had 4 years of remaining depreciable life. The repair cost was inappropriately capitalized. Green Co. reported operating income of $166,000 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. Answer is complete but not entirely correct. Operating Income $ 13,500 b. Assume that Green Co.'s total assets at the end of the prior year and at the end of the current year were $933,000 and $1,015,000, 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

Answer 1

Calculation of Operating Income Repair Cost Capitalised in error = $18000 Depreciation expense = (18000/4) $ 4,500 Operating Income originally Increase in repair expense Decrease in depreciation expense Correct Operating Income $ 166,000 $ (18,000) $ 4,500 $152,500 Operating Income = $152,500 | Calculation of ROI ROI = Operating Income/Average Total Assets ROI for original data = 166000/(933000+1015000)/2 17% ROI for current year based on corrected data $ 1,015.000 less Year end assets Net book value of Mistakely capitalised $ Accumulated depreciation $ Correct year end assets 18,000 (4,500) $ (13,500) $1,001,500 ROI = Operating Income/Average Total Assets ROI for corrected data = 152500/(933000+1001500)/2 16% Original data Corrected data ROI 17% 16%